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- A non-disclosure agreement (NDA) is a legally binding contract signed between two parties that establishes a confidential relationship between them. The parties involved agree that any sensitive information that will be shared between them will not be disclosed in any other setting.
- Non-disclosure agreements play an important role for startups that are bringing in a consultant. Through an NDA, founders have the confidence to share sensitive information; specify what constitutes “confidential;” limit the reasons for the use of confidential information; spell out the consequences of unauthorized disclosure, and preserve healthy business relationships going forward.
- A non-disclosure agreement should generally include clear-cut definitions of the "disclosing party," the "receiving party," and “confidential information.” It should also include appropriate clauses such as the exclusions clause, non-disclosure obligations, timeframe, jurisdiction, and any relevant additional clauses. Lastly, the NDA must be signed by all parties and representatives involved.
- A non-disclosure agreement is of greater benefit if all parties clearly understand what will be considered a breach of the NDA. Therefore, founders should establish what constitutes a breach of confidentiality.
- If confidential information is leaked and the point of failure is identified, there are a few remedies available to the startup. The most obvious one would be to terminate the consultant responsible for the leak. If the leak isn’t severe, then appropriate disciplinary action should be sufficient.
- Founders would also do well to establish who is accountable for breaches of confidence. If the information is disclosed and NDA is breached, then the consultant is liable to be penalized. If the consultant represents a firm, then that organization also comes under scrutiny.
What is a Non-Disclosure Agreement?
A non-disclosure agreement (NDA)is a legally binding contract signed between two parties that establishes a confidential relationship between them. The parties involved agree that any sensitive information that will be shared between them will not be disclosed in any other setting.
This document commonly comes into play when founders are engaged in negotiations with other startups. When an NDA is in effect, startups can share all forms of sensitive information with the people or entities who have signed without the worry of this information being disclosed to anyone else (e.g., their competitors).
A startup should make a practice of having its consultants sign an NDA. This is necessary as consultants or contractors are professionals who are hired for specific projects and collaborate with various other startups. This means that they may be hired by your competition as well. So a non-disclosure agreement makes sure that they do not disclose any sensitive information that you share with them.
NDAs are also drafted between companies looking for capital and future investors. In such instances, the NDA makes sure that none of the startup’s plans and trade secrets are disclosed to their competitors. The NDA helps protect information like market strategy, sales plans, development/manufacturing processes, and potential customers that you may have your eyes on. NDAs are also applicable to employees who will have access to assets or information that your startup may deem sensitive.
If an NDA is violated, then the disclosing party will have the right to seek court action against the receiving party -- which could be required to pay monetary compensation in an amount determined by the court.
NDAs can take a variety of different forms based on the entities involved. A “Standard NDA” covers most businesses, creative endeavors, and product development activities. A “Mutual NDA” is where the flow of confidential information goes both ways, such as during a merger. Lastly, when employees, interns, or consultants sign an NDA, it is known as an “employee NDA.”
Why your consultant needs an NDA
NDAs play an important role for startups that are roping in a consultant.
The following are some of the advantages of using NDAs for consultants:
Provides confidence to share sensitive information
Many startups, even the early-stage ones which are just stepping into the market, have a lot of confidential information regarding the inner workings of their nascent company. Due to the sensitivity of this data, founders might feel reluctant to share it with people. However, to conduct a thorough investigation, consultants must have access to proprietary information.
A non-disclosure agreement will help solidify:
- Information that is considered confidential by your startup
- The conditions under which another party can disclose confidential information
- The period for which the disclosed information is considered confidential
- The consequences if the executed NDA is breached
Ensures clarity concerning what constitutes “confidential”
To most companies, all their information, no matter how trivial/minor, is confidential. This can cause a lot of confusion going forward. If the parameters around “confidential information” are not defined properly, then the consultant may not feel confident doing any business with the startup for fear of being liable to lawsuits. Therefore, make sure to cast a clear (and preferably wide) net to cover all grounds, making sure that all sensitive information is protected.
As the founder who is drafting the NDA, you must make sure that it should include every format that information is shared in. The means of sharing the information could be tangible, oral, or in any written document marked “confidential.”
Limits reasons for use of confidential information
Sensitive information is generally disclosed to individuals who are helping the business in some meaningful way. However, the information (or access to it) might be utilized in other ways. An NDA can place limits on how the information could be used by a consultant. If the information is used for any reason other than what is stipulated, the receiving party (in this case, the consultant) will be in breach of the agreement and could face legal action.
Defines the consequence of disclosure
An NDA covers all avenues that are considered confidential by your startup. It also underlines the consequences that the signing party (the consultant) may face in case this information is made public by them to anyone who is not authorized under the NDA. Clarifying the consequences of such disclosure ensures that all parties are on the same page. This, in turn, makes sure that the NDA is being taken seriously by the consultants.
The consequences of breaching an NDA generally play out in a few ways. If breached, the disclosing party may suffer loss or damages and may be eligible to receive future compensation. Furthermore, the agreement may also give the disclosing party the right to apply for a legal suit in court to stop the receiving party from sharing any more confidential information.
Preserves business relationships
An NDA can help preserve business relationships. With the information protection that an NDA provides, startups can have a healthy relationship with their consultants, knowing that their sensitive information is well protected. Putting pen to paper and writing down the rules in the form of a contract makes sure that every party involved is on the same page.
Non-Disclosure Agreement Template
When drafting an NDA, there are a few clauses that must be kept in mind to cover all bases. The following are some of the essential clauses that must be included:
An NDA should begin by clearly stating the parties which are going to be covered. The company drafting the contract will be known as the “disclosing party” and the consultant will be known as the “receiving party.” In the case of a mutual NDA, all involved parties are considered “disclosing” and “receiving.”
Specifying Confidential Information
One of the most important parts of drafting an NDA is clarifying the information which is considered confidential. There are some common topics that you can refer to to have an idea.
Trade secrets should be deemed as confidential information in an NDA and include information like special formulas, tech designs, blueprints, instruments, developed software, patent details, etc.
Business ventures like audits; partnerships; advertising; marketing; mergers; real estate; pricing structure, and consultations are also considered confidential information. Recipes, web design, illustrations, graphic design, video film, etc. fall under “creative endeavors” and can also be included in an NDA.
The list of confidential information could be as long as you want. Regardless of what you add, make sure that it is written in clear language and is understood by the receiving parties.
While there is a clause for all the information that is deemed protected, the exclusion clause covers all the information which is not considered confidential under the NDA. The disclosing party can choose the information that they choose to be excluded.
On the other hand, there is certain information which -- by its nature -- cannot be made confidential. This includes:
- Information that is in the public domain
- Information accessed by the receiving party previously under an NDA
- Independently developed or discovered information
Non-disclosure obligations make up the bulk of an NDA. This clause is used to outline the obligations that the receiving party has toward the confidential information. This is a big section and the clause is generally explained in multiple parts, each detailed quite meticulously.
The non-disclosure obligations section can include the following:
- Non-disclosure of transaction: The receiving party promises to not disclose information regarding any transaction, either completed or discussed.
- Non-compete: Either party refrains from engaging in business which puts them in competition with each other.
- Non-circumvention: If business contacts are shared by the disclosing party, then the receiving party cannot bypass the agreement and directly conduct business with those contacts.
The time frame states the periods within which the NDA is in effect. This clause will include a beginning date (effective date) and an end date (termination). The time between these two dates is known as the “disclosure period.”
The jurisdiction clause covers the legal entity by which the NDA will be governed. If the NDA is breached and a lawsuit is filed, then the trial will be governed under the agreed-upon state law. All trials and hearings will be conducted in a court within this state.
There are additional clauses that can be added to the NDA based on your specific requirements. These clauses can be:
- Remedies: Entails consequences of violating the NDA
- No License: Specifies that the NDA doesn’t provide either party ownership of the provided information
- Amendments: States that the NDA can be amended at any given time
- Severability: States that if one part of the NDA is legally ruled invalid and that part is eliminated from the contract, then the rest of the NDA remains valid
The NDA must be carefully reviewed and then signed by all involved parties and representatives. Every member who is going to be privy to confidential information should have their signature on this page.
Establish what constitutes a breach of confidentiality
An NDA is of greater benefit if all parties clearly understand what will be considered a breach of confidentiality.
The following are some of the ways in which a consultant can breach an NDA:
- By using part or all of the shared confidential information to launch a startup or venture similar to that of the disclosing party
- By providing insider information to competitors by any means for personal or financial gain
- By sharing confidential information with external parties for conspiratorial purposes
- By allowing an unhappy or disgruntled employee to leave with confidential information
- By allowing sensitive information to be shared via any mass media platform by sharing it with journalists, bloggers, etc.
- By revealing a project prototype before its official launch date
- By sharing confidential information with any unauthorized personnel
If confidential information is leaked and the point of failure is identified, there are a few remedies available to the startup. The most obvious one would be to terminate the consultant responsible for the leak. If the leak isn’t severe, then appropriate disciplinary action should be sufficient.
Establish who is accountable for breaches of confidence
When an NDA is signed by two parties, it is to be signed by the representatives of both participants (or the participants themselves). If it is a unilateral agreement, then the flow of information is usually one-way -- from disclosing party to receiving party -- but if it is a bilateral agreement, then the flow of information goes both ways.
When it comes to consultants, the NDA will be a unilateral agreement. In this case, the consultant will be the receiving party gaining access to the sensitive information. If the information is disclosed and the NDA is breached, then the consultant is liable to be penalized. If the consultant represents a firm, then that organization also comes under scrutiny.
Learn more with us
- Founder's agreement template
- Employment non-disclosure agreements
- Independent contractor non-disclosure agreement
- Confidentiality agreement vs. non-disclosure agreement (NDA)
- Learn more about accounting for startups
Access more guides in our Knowledge Base for Startups.
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If you're looking for help with understanding and/or executing NDAs, get in touch with us.
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