Keeping it confidential: When to use a non-disclosure agreement
Non-disclosure agreements (NDA’s) are much more common than you think and asking someone to sign one is often a completely appropriate request. While very common in the United States, they are also widely used in Australia to protect confidential information owned by a person or a business.
In this article, I break down what a non-disclosure agreement is and look at common examples of where it is used. I also let you know what a mutual non-disclosure agreement is.
Want a confidentiality agreement? We have a choice of two templates available:
What is a non-disclosure agreement?
Non-disclosure agreements are sometimes called confidentiality agreements. They are typically used when you want to share a business idea with another party, disclose information that is private to a business or have preliminary discussions before you enter into a contract.
For example, I have had clients who make beauty products and need to find a manufacturer. So they may need to share their secret product recipe with the manufacturer. In this instance, they would need to ask the manufacturer to sign a non-disclosure agreement. Upon signing the NDA, the manufacturer is sworn to secrecy and cannot pass on the recipe, share it with their clients or start producing or selling the product. If the manufacturer passes on the secret recipe after signing an NDA it gives the owner of the secret recipe rights to claim damages for the disclosure.
A non-disclosure agreement can also be used if you are looking for potential business partners or investors. When sharing information with potential partners you can get them to sign a non-disclosure agreement so that any information you disclose cannot be shared or used in any way.
By signing a non-disclosure agreement, the person or organisation you share with is promising to keep all the information shared with them private. If they were to then go and share that information, then they are in breach of the agreement and you have a path of recourse for that breach and any loss of profits.
If, for example, you had invented a product and your idea was leaked to another business and they then went on to develop a similar product and sell it, you could seek to get a share of their profits made from the sale of that product if you could prove it was your product they had copied.
A non-disclosure agreement can also protect an idea. If you have an idea and you haven’t gone to IP Australia to protect it by way of patent or design application or even lodged a trademark, but you need to share that sensitive information and protect your ideas and trade secrets, this is where an NDA would be highly beneficial.
Asking people to sign NDAs is not uncommon. They can be used at any stage of a business's life cycle and given to any people who you wish to discuss your idea or business with.
If you are seeking investors, talking to a prospective accountant or even talking to a prospective employee before they have signed an employment agreement, you might choose to give them an NDA.
An NDA is also used when you intend to sell your business. You might use an NDA at the point where potential buyers are doing their due diligence and looking into whether it is a good business for them.
When you are providing access to all of your business paperwork which can include information that affects the privacy of your staff members such as dates of birth, addresses and their length of employment, plus your financial information, all of this is sensitive information that should be protected.
What is a mutual non-disclosure agreement?
A mutual non-disclosure agreement means that it works both ways. So, two people might be looking in a business partnership together and are both sharing ideas and information to see if it’s a good business decision. A mutual non-disclosure agreement means that both parties must keep each other’s information private.
Another example of where a mutual non-disclosure agreement can be used is in a business coaching relationship. If you are intending to work with a business coach, it’s likely you will be sharing information such as your revenue because your goal might be to increase that. They may not be able to help you increase your revenue until they can see all your figures and where you’re making and losing money. Having your coach sign an NDA can provide some peace of mind when sharing highly confidential information like this.
Non-disclosure agreements when you have a business coach
As part of our coaching agreement template, we have confidentiality clauses that can act in a similar way to an NDA. But until you have a proper client coaching agreement in place, and if you’re doing preliminary work with a coach, getting an NDA is a good stop-gap in between.
If you are getting business coaching and they do not provide a Client Agreement, then you have to consider what you share with your coach and how that information is being used.
How long are non-disclosure agreements good for?
Some non-disclosure agreements last indefinitely and then some have a time period on them. A previous client of mine had an American business ask them to sign an NDA which lasted for 5 years. My view that this was a long time, but clearly the business wanted to protect their information. Depending on your needs, an indefinite or longer time period may be required. A famous example is the Coca-cola recipe which remained private for over 100 years.
If you share information about your financial status, recipes or methods that are not trademarked or patented and you need to bring people into your business, whether it’s short or long term, you need to consider getting them to sign an NDA first.
It is helpful to have a template NDA agreement pre-prepared and ready to go so that when an event or conversation that comes up requires confidentiality, you can draw upon it quickly and easily.
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For Australians, we have a non disclosure agreement template available here. To enquire about your specific needs or for a custom non-disclosure agreement, book a time here.