While nondisclosure agreements (NDAs) can’t protect you in every situation, they are an essential tool for protecting confidential information about your growing company.
In this guide, we’ll explain what NDAs are, when you need one (and when you don’t), and how to create a policy and process that will protect your proprietary information as your company expands.
What’s inside this guide:
- What is an NDA?
- Who should sign an NDA?
- When you don’t need an NDA
- What if you forget an NDA?
- What’s the difference between one-way and mutual NDAs?
- Considerations for building a startup NDA?
- Streamlining your NDA process with DocSend
You can also download our free NDA template to make the whole process even easier.
What is an NDA?
An NDA is a legally binding document designed to protect your intellectual property (IP) and other proprietary info. They typically forbid the signee from discussing the stipulated information with others or using it for their personal gain. In the event of a breach of contract, you or your company can take legal action to prevent further breaches or recover damages.
NDAs can protect only specific types of information. Your basic business idea, for example, is not proprietary information, because it’s not private. If you’re pitching your ideas at networking events, then those ideas are not confidential.
What you can protect are your company secrets: highly technical processes, business plans, lines of code, or other intellectual property assets that are unique and important.
While NDAs are legal documents, they are only as effective as your willingness (and financial ability) to enforce them with a lawsuit. Even so, they are important for setting a tone of confidentiality and discouraging careless chatter.
Who should sign an NDA?
All startups should have a standard NDA that they can use to protect proprietary information about their company. Deciding when and where to use it depends on your company and the information you are trying to protect. Anyone who interacts with or could be knowledgable of proprietary info should sign an NDA.
Perhaps the most common and most important case for using an NDA is for independent contractors who do work for your company. These individuals are not bound by the same contractual and social ties as regular employees but may still come in contact with sensitive information during the course of their work. It’s a good idea to have any freelancers or contract workers sign an NDA before you begin a relationship.
If your company outsources components of their process to outside vendors or you are closely partnering with another company on a shared initiative, it’s a good idea to have them sign an NDA to make sure they don’t misuse proprietary information.
The people you launched your business with should theoretically be people you can trust. But situations can change as your company becomes more (or less) successful. Individuals who have the greatest access to the company’s IP should sign NDAs in case they leave the company or attempt to start a rival company.
Some companies require all employees to sign NDAs, and some don’t. Your standard employment agreement may cover similar ground regarding company ethics and privacy. If you have employees who are working in close contact with sensitive information, you should consider having them sign one as well. This will protect you if they are poached by another company.
You may want to have late-round interview candidates sign an NDA if they are privy to any proprietary internal processes or information during the hiring process. This is particularly true when hiring for higher-level positions, such as CEO or CFO, where the candidate may be coming from a competing company.
When you don’t need an NDA
While NDAs are an important tool, some startups fall into the trap of using them too broadly or too often. Not only is this ineffective and a waste of time, but sending out unnecessary NDAs can also make you look unprofessional and inexperienced.
NDAs are useful for protecting only private information, not information considered common knowledge. If you’re attempting to guarantee confidentiality for information that has already been disseminated to the public in some way (like in public documents, speaking events, or in networking), then you won’t be able to enforce nondisclosure.
As a rule, VCs don’t sign NDAs when evaluating pitch decks and other fundraising materials. They are often considering multiple ideas in similar spaces, and negotiating confidentiality wouldn’t be practical or time-efficient. Insisting that a VC sign an NDA before they can review your pitch will make you look inexperienced and might kill a deal outright.
Nervous about sending your materials to a VC without the protection of an NDA? Password-protected documents can help keep your materials safe by preventing unauthorized sharing. They also allow you to revoke access if a VC declines to meet.
What if you forget an NDA?
It’s been known to happen — you send confidential material, only to realize later that you forgot to send an NDA. You can calmly ask the person to sign one retroactively, and hopefully, they will agree. Try to prevent this from happening again by putting a more streamlined system in place.
What’s the difference between one-way and mutual NDAs?
Depending on the parties involved and who is disclosing or receiving confidential information, your company will use either a one-way or mutual NDA in most situations.
What is a one-way NDA?
One-sided NDAs (also referred to as one-sided or unilateral NDAs) are used when only one side of the relationship will be sharing private information with the other. In exchange for receiving confidential information, the receiving party agrees not to wrongfully use or disclose confidential information to third parties.
When should I use a one-way NDA?
The most commonly used agreements, one-way NDAs are often used for contractors, employees, and other people exposed to your company’s private dealings. One-way NDAs are also commonly used when engaging with investors.
For example, say you’re talking to an investor who wants to better understand what makes your company so unique in the market. In this situation, you plan to share trade secrets with the investor but the investor isn’t sharing any confidential information back. Here, a one-way NDA protects your information by only binding the investor to the terms of the non-disclosure agreement.
What is a mutual NDA?
A mutual NDA (also referred to as a bilateral or two-way NDA) binds both parties by the terms of the agreement. Mutual NDAs allow two parties, such as two different businesses, to discuss confidential information without risking wrongful use or improper disclosure by either party.
When should I use a mutual NDA?
Mutual NDAs are beneficial for partnerships in which both parties need access to each other’s confidential information. These NDAs are very common for businesses that want to explore working together on a project, partnership, or merger.
For example, say your company is interested in developing and launching a product or integration with a non-competing company. A mutual NDA protects both your and the other company’s confidential information so you can work together without the risk of wrongful use or disclosure by either side.
What are custom NDAs?
While the standard agreements within one-way NDAs often cover a business’s needs, exceptions will always exist. Custom NDAs are quick, one-way agreements that can be modified or customized to address a specific business exception not adequately covered in the standard agreement.
Building a startup NDA
It’s a good idea to create a standardized NDA that you can easily send out when needed. Our NDA template can help with this, but here are some important concepts to consider when creating your own:
- Scope of the agreement. NDAs typically have two requirements of signees:
- They must keep the information a secret.
- They must not use the information themselves.
Occasionally, businesses add other provisions, like noncompete agreements or prohibitions against soliciting employees.
Mutual NDAs vs. non-mutual NDAs
Since NDAs can be mutual or one-way, determine how and when you plan to use both types of agreements.
- One-way NDA agreements are more common; use them when only one side of the relationship will be sharing private information with the other. Examples of this would be NDAs for contractors, employees, and other people who might be exposed to your company’s private dealings.
- Mutual NDA agreements bind both parties by the terms of the NDA. They are useful for partnerships in which both sides might have access to each other’s confidential information. They are trickier to create and enforce, so avoid them unless strictly necessary.
Terms of the NDA agreement
How long will the NDA last? Some NDAs last forever as permanent information blockers. But recipients often ask for them to expire after a certain number of years (often two to five years). This is because most proprietary information becomes public or outdated over time (nullifying the need for protection), and the cost of indefinitely policing an NDA is prohibitive.
Depending on how legally savvy the recipient is, it’s reasonable to view any NDA you send as the starting point for a negotiation. Be prepared for the other party to come back with potential edits or amendments.
Free one-way NDA templateDownload now
Streamline your NDA signing process with DocSend
After creating your NDA (either with our NDA template or on your own) and decided how to use it, you’ll need to determine how you’ll distribute it. The fastest, easiest way to send an NDA is with DocSend’s One-Click NDA on the advanced or enterprise plan.
You can easily add an NDA as a requirement for viewing any document, so you’ll never forget to put your company’s security first.