The case of a $6.8 million ruling against an ex-employee accused of stealing company trade secrets is one proof of why companies need non-disclosure agreements, or simply, NDAs.
However, poor execution or a mindless mistake in drafting NDA may lead to serious risks.
That’s why you need to have good NDAs ― and that means including its essential elements and eliminating potential erros.
So in this article, let’s guide you through the key components of NDA as well as its different types. Also, we’ll provide you with 4 free templates and an automated drafting solution so you can create and sign NDAs at scale.
Without further ado, let’s get into it!
What are non-disclosure agreements?
A Non-Disclosure Agreement (NDA) is a legal contract between two or more entities, which outlines confidential information that shouldn’t be shared with any third party.
NDAs enable contracted parties to engage in business without compromising the privacy of information exchanged. Instances, where NDA is a must include hiring new employees, service contracts, and business partnerships. Since they’re legally binding, violating an NDA can result in penalties, such as damages or an injunction.
Some of the protected information include:
- Trade secrets
- Business and marketing plans
- Financial information
- Client records
- Proprietary information
- Blueprints, and design
An NDA may also be called a confidentiality agreement (CA), confidential disclosure agreement (CDA), proprietary information agreement (PIA), or secrecy agreement (SA).
So if you’re an employer creating an NDA for the first time, here’s what you need to know about them:
- NDAs protect an employer’s confidential information ― also known as your competitive edge.
- NDAs maintain the legal liability of an employee who decides to leave the company. For example, if a researcher leaves, an NDA can prevent him from sharing trade secrets with competing businesses.
- NDAs protect you from defamation claims. If an employee posts negative comments about their employer, the NDA may prevent them from disclosing confidential information that supports their allegations.
What is the purpose of an NDA?
Businesses use NDAs to limit the spread of sensitive information, which if shared, can cause business losses, harm client relationships, and threaten the company’s growth.
Here are some specific cases in which NDAs are important:
- When HR hires new employees. It’s common to ask newly hired employees to sign non-disclosure agreements to prevent them from sharing confidential knowledge they’ll learn about the company.
- During business transactions. Sales contracts often include NDAs. They’re used to protect trade secrets that are likely to be exposed during the transaction.
- Whenever there’s the procurement of services. Contracts with service providers may contain sensitive information. As such, the procurement team may require an NDA to prevent disclosing any of this to outside parties.
Are NDAs legally binding?
NDAs are legal. However, an NDA must be reasonable in its scope.
If you’re an employer, you can’t use it to unfairly restrict the employee’s ability to find new work. So an NDA that forbids an employee from disclosing information about their former employer’s trade secrets would be enforceable.
However, if it prevents an employee from working for a competitor even after 1-2 years they’ve stopped working with you appears unreasonable.
There are situations where NDAs aren’t valid:
- If the information disclosed is already publicly known.
- If the information is needed to prevent illegal or harmful activity.
- If the terms are excessively broad like an indefinite period of enforcement.
Also, note that an NDA is never without risk. Some risks you need to manage are:
- They might create a false sense of security, causing one party to disclose more than they should.
- They can be a barrier to communication that resolving disputes becomes impossible.
- They can limit the creativity of parties to share new ideas for fear that they’ll violate the contract.
Types of non-disclosure agreements
NDAs fall into two basic types: mutual (two-way) and unilateral (one-way).
A mutual non-disclosure agreement is used when two parties will be sharing confidential information like when considering a merger or joint venture.
Meanwhile, a unilateral NDA applies when only one party is bound by the agreement not to disclose the information. Only one party is required to keep information secret. A familiar example is employment contracts.
What are the key elements of an NDA?
These elements must be included in order to make the non-disclosure agreement enforceable.
An NDA is only binding on the parties who sign it. If there is any ambiguity about who those parties are, then the agreement may be rendered invalid. Ideally, include the full legal name and address of each party.
Confidential information definition
Be clear about what is considered to be confidential information. It should not be public knowledge and which, if disclosed, could give one party an advantage over the other.
Scope of the confidentiality
An NDA is a two-part obligation ― maintain the confidentiality of secret information and not use it. So if the scope is too narrow, there’s a risk that some information may not be protected. Alternatively, if it’s too broad, the receiving party might have trouble complying.
Breaking an NDA is punishable. A clause should specify the consequences for breaching the NDA, like financial damages or legal action. Having a penalty clause will discourage anyone from disclosing sensitive information.
Timeframe of the contract
Does it matter how long the information must remain confidential? Yes, because NDAs aren’t enforceable forever. It should be clear how long is a non-disclosure agreement applicable. This can be a number of years or until the information is no longer considered a trade secret, but never indefinitely.
Return of Information
A return of information clause requires the receiving party to destroy or return all confidential information at the end of the agreement. So no one ends up in possession of sensitive information they shouldn’t.
Exceptions to confidentiality
Some information can be excluded from confidential disclosure like information that is publicly available. Or information that was known prior to signing.
If there is a dispute about the agreement, it should be stated where the dispute will be handled ― that’s clearly identifying the jurisdiction in which the agreement will be valid. In short, the geographic awareness scope of the contract should be specified.
Free non-disclosure agreement templates
No matter how well-versed you are with NDAs, drafting one from scratch isn’t efficient. Fortunately, there are a number of quick solutions online ─ free NDA templates
We recommend these free NDA samples from Avokaado.
- NDA startup template to define the rights and obligations of the parties. You can easily draft it with an automated questionnaire
- Template for Mutual NDA to allow two parties to exchange confidential information
- This Unilateral NDA template for the discloser to securely transmit confidential information to the recipient
- Standard NDA for low-risk agreements ― OneNDA to reduce business legal work, increase transparency and speed up business dealings
How to use Avokaado’s workspaces to automate non-disclosure agreements
Avokaado is a contract lifecycle management software that will help you create, manage, and process NDAs. Here’s how.
- It lets you generate and attach NDAs to main contracts.
During creation, you have 3 options in drafting your NDA. Start from scratch, upload the last NDA you used or import a pre-built template from the tool.
- If you choose to upload your own NDA document. You automate the process by:
After uploading, check if your document is broken up properly so you can add data and questions in a clause (multiple options and choices). That ensures that every scenario possible is covered. Your output is a questionnaire-like NDA for future users.
- If you choose to start with a template, here’s your course of action.
Free templates in the tool were engineered by Avokaado lawyers. Simply visit the store where NDAs are housed. Import your chosen NDA template then click on it to go to the document’s pre-generated questionnaire. Drafting is as simple as answering the questions.
Time for collaboration then. You can add teammates, clients, or vendors as viewers or editors.
However, only the editor can attach additional documents. So if you need to attach an NDA to your main contract, give him/her the editing rights. Just click the “+Add” button to get a set of documents.
- It lets you view, store and sign files in one seamless flow.
Avokaado’s centralized repository is accessible to your entire team round-the-clock. When you keep everything in one place, you can track changes in real-time and get everyone on the same page.
Avokaado workspace lets you see everything as it happens with your contracts ― create new documents, view, and track their statuses.
Because everything is digital, you can easily share documents and make edits. If you have to collect their digital signatures, Avokaado is seamlessly integrated with Dokobit and SignNow.
Automated creation of NDAs
If you’re looking for a way to automate the process of creating non-disclosure agreements, Avokaado is worth checking out.
With our free trial, you can get started in minutes. You’ll then see how managing NDAs can be a painless business experience.