What is the purpose of a nondisclosure agreement?

In a time when information can be as valuable as gold, knowing about (and using) a nondisclosure agreement (NDA) is extremely important. 

You can’t conduct transactions in any industry without considering various laws and contractual agreements — and the NDA is one contract every business owner should be familiar with. Why? Because it provides a legal basis regarding information sharing. 

Below, we walk through a few FAQs about these essential legal documents.

What’s the purpose of an NDA?

The purpose of an NDA is to protect the information two or more parties exchange. As long as all parties involved sign it, an NDA is a legally binding agreement that prohibits the sharing of sensitive or confidential information with external parties. 

“An NDA is greatly important to us as business owners, as it protects the information we share with other parties, such as our customers, business partners, and employees,” says Martin Seeley, CEO of MattressNextDay.

What negative outcomes could a business face if it fails to use an NDA?

While there are many scenarios where not employing an NDA could be detrimental, common use cases include new invention patents. Creating something new often requires collaboration between two or more people, and that involves the collaborators sharing confidential information.

However, the more people you share this information with, the more opportunities arise for one of the collaborators to either use it themselves or share it with a third party to create the same invention first. 

“If you lose the chance to patent your invention first, you miss out on market and revenue-generation opportunities. You also have sunk costs and time regarding your R&D efforts,” Seeley explains.

Protecting proprietary processes is another example. Discovering someone has leaked your company’s standardized process to competitors is a worst-case scenario. While not every process is worth its weight in gold, some processes are highly confidential because what they produce is valuable. 

Consider also that the value may not lie in what a company produces, but how the company produces a product. For example, an extremely efficient process that develops a product at half the cost of other companies presents a competitive advantage. This creates the need for an NDA to protect the process.

James Pearson, CEO of Eventuring Enterprises, says that the NDA is helpful when you need to be flexible with the rules regarding the disclosure of the process to other parties. For example, you may seek a partnership with a complementary firm that needs to be part of the process to derive further value. 

“To keep details of your process from escaping your organization, you can use an NDA to limit information sharing of these parties. Without an NDA, you run the risk of these parties leaking the confidential information to your competitors,” Pearson says.

Not using an NDA can also make your employer-employee relationships risky. Employees often have direct access to lots of sensitive or confidential information while performing their job duties. Without an NDA in place, any employee can freely use that information outside of the company, such as when leaving to work for a competitor.

The same concept applies to gig workers, which editor Samantha Moss uses at her company Romantific. Whenever she hires contractors and the like, she ensures the privacy of her company’s information by having them sign NDAs. 

“Any information I share with them while they perform work for me stays private. Not using an NDA opens the door to leaking our intellectual property and trade secrets to the public. Such an occurrence could make our business less unique and make it hard to differentiate ourselves,” Moss says.

NDAs are clearly an important legal tool for businesses of all shapes and sizes. But you’re probably not a legal expert, so use this NDA template the next time you need to keep someone from disclosing important information. It’s straightforward and can save you a lot of time.

AUTHOR
Justin started his career as a traditional business lawyer. Now, he’s all for digital transformation and bringing his practice up to pace. Making law paperless and a sustainable future are his dreams.

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