What does NDA mean?

by Adarsh Raj Bhatt in
person writing on brown wooden table near white ceramic mug

Photo credit: Unsplash

Key Takeaways

  • A Non-Disclosure Agreement (NDA), also known as a confidentiality agreement (though the two differ from each other), is a legally binding obligation to prevent disclosure of specified confidential information.
  • It may be mutual or non-mutual and may cover a period of 1 to 10 years depending on its purpose, the type of business arrangement, and the nature of information concealed.
  • An NDA is typically signed by all involved parties before a business collaboration begins or, in the case of an employee NDA, when a new employee joins a startup.
  • NDAs include specific details about what it covers. Since it is essentially a data disclosure agreement, it covers everything from plans, financial profits, price strategies, etc., and protects them from competitors.
  • State and federal laws must be considered for an NDA. 
  • Last, it is important to determine if an NDA is really needed in a particular situation.

What does NDA stand for? 

NDA stands for Non-Disclosure Agreement. It is a legal agreement for keeping certain information confidential. Any breach in an NDA is considered a breach of contract and can result in a lawsuit. An NDA, also known as a confidentiality disclosure agreement, necessitates the authorization of parties apart from whom the details included in the NDA cannot be disclosed to anyone else. Often, an NDA is deemed essential before beginning any joint business venture. Employees at certain startups are also required to sign an NDA for keeping the founder's business information confidential (this is known as a non-mutual agreement). NDAs are also used when a startup is in talks with its potential investors. This prevents the disclosure of their trade secrets and business plans. A trade secret qualifies as intellectual property that has certain economic value. 

An NDA is required in situations such as: 

  • Discussing the sale or licensing of a product or technology
  • When an employee has access to proprietary information
  • While dealing with a potential business investor
  • Receiving services from a company that has access to sensitive information
  • Dealing with a prospective buyer

Requirements of an NDA

NDAs may vary according to one’s needs but the essential requirements remain the same for almost all of them. The language of an NDA forbids all those bound by it from disclosing the confidential information it covers. 

Some requirements for an NDA are as follows:

  1. The names of parties who have formed the agreement, and also those who are exempt.
  2. A clear definition of what is to be kept "confidential" in a particular case, and any exclusion from said confidentiality
  3. A statement clarifying where and how the protected information should be used
  4. The time period that the NDA is valid for
  5. Miscellaneous provisions such as laws that apply to the agreement or compensation of damages in case of a dispute.

What does NDA mean?

An NDA is a legal contract that aims at preventing the exploitation of confidential information or sensitive content. This may occur by disclosure and an NDA prevents any such disclosure since the parties are bound by a legal contract. 

A unilateral non-disclosure agreement is generally made between two parties:

The Disclosing Party: Usually, this party is the person or entity disclosing the confidential information.

The Receiving Party: This party has the responsibility of maintaining confidentiality concerning the protected content.

In the case of a Mutual Non-Disclosure Agreement (MNDA), also known as two-way NDA, both parties are considered to be disclosing and receiving parties. These parties may generally be startups planning on a joint venture and thereby sharing confidential information - like their trade secrets, business plans, target customers, and so on.

An NDA must clearly spell out what information is to be kept confidential. This is for the benefit of both parties since the receiving party will then know what it has to refrain from disclosing. 

The specified information in an NDA, however, cannot include the following:

  1. Information that was known to the receiving party before the execution of the agreement
  2. Information that is in the public domain
  3. The research established independently by the receiving party
  4. Details disclosed to the receiving party by an individual/organization outside the NDA, meaning the disclosing party can only lay down such information in the NDA that it - and it alone - can claim sole ownership of.

How long is your NDA valid for? 

There is no specific time period legally validated for an NDA. As such, the duration of an NDA mostly depends on the nature of the shared confidential information. Some NDAs could also be indefinite but that could make the shared confidential information commonplace. 

Some important points to remember while discussing how long an NDA remains valid are as follows:

  1. The duration of an NDA typically depends on the preferences of the parties, details of the confidential information shared the relationship between the parties, and so on. The most important of all factors is the nature of the information shared.
  2. It is important, however, to learn of the difference between "term" and "duration," which can sometimes be used interchangeably. There is a difference between the period of time for which the relationship between the two parties lasts and the period of time for which the sensitive information needs to be kept confidential. "Duration" is the preferred word to use while describing the latter (i.e., the desired time period of confidentiality).
  3. There is an important difference between terminating and non-terminating agreements. Terminating non-disclosure agreements exist for a defined time period, beginning and ending on specific dates. Non-terminating agreements are indefinite. In one scenario, the business relationship is ongoing and perpetual; in the other, the confidentiality of sensitive information is permanent. There is no specific date on which a non-terminating agreement ends. 
  4. Common law requires trade secrets to be protected by an NDA until they are no longer considered trade secrets, meaning until they become part of the public domain. The United States Patent and Trademark Office defines trade secrets as the fourth form of intellectual property.  A trade secret differs from patent filing because a trade secret can remain a secret indefinitely, unlike a patent which can expire. Hence, a trade secret is more useful for any startup because of this flexibility in terms of the time period. The U.S., like other member countries of the World Trade Organization, bases its trade secret laws on the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). According to this agreement, a trade secret is defined as information that must be used in business and yield economic advantage over other players in the market who do not use it or have access to it. This information can include formulas, programs, methods and processes, and other necessary data essential for the profitable future of the startup. Hence, an NDA may also be called a data disclosure agreement. A trade secret is protected by common law but it is important to define the limits of the agreement if other parts of the agreement have a different expiration date or if the business relationship is temporary.
  5. It is not always important to include a Duration Clause in the agreement, but it may be helpful in cases where the confidentiality and the business relationship expire at different times.
  6. The "term" of an NDA could vary from 1 to 10 years (or more) depending on the principles of the business relationship. This gives the involved parties ample time to cover loopholes, should any remain, in due course. In any case, the "term" specified in the NDA must be realistic so that each party can meet its business requirements within that stipulated time. 
  7. Every key aspect must be specified in the NDA(e.g., its duration). 

How to sign an NDA? 

It is very important to note that violation of an NDA can result in significant monetary loss, as well as legal trouble. 

The following steps are essential before signing an NDA:

  • Define the sensitive or confidential information: It is very important to first define what is to be kept confidential as that is the core of an NDA. What is to be kept confidential and for what reason must be clearly specified. It is equally important for both parties to understand these statements, so they know the extent of their allowances in terms of disclosing information.
  • Identify the parties: It is equally important to identify who the parties to the agreement are. The disclosing and the receiving parties must be identified, and a note of their acknowledgment must be made. It is equally important to ensure that the startup's legal name is correctly spelled out in the entire document, otherwise, the whole document can appear invalid. If it is a non-mutual agreement, like an employee signing an NDA for their employer, then it should be noted that one person is signing it as a condition of employment.
  • Distinctions: Everything must be spelled out, even the most minute details, such as whether the information will be provided on a "need to know basis" or that the recipient has no right to use the information in any other way than as specified in the agreement.
  • Future changes: It is important to incorporate any possible future changes that might occur at the startup, such as employees leaving, mergers, and so on. A clause must be added with the assertion that the NDA would apply to such potential organizational changes.
  • Exclusions: These generally include common law, public information, or research developed by the receiving party independently.
  • Obligations of the recipient: The nature of allowance provided by the agreement (i.e., what the recipient can do with the information they receive, what is prohibited, etc.)
  • Time periods: Questions like what is the duration of the agreement, if it is indefinite or not, etc., need to be covered in this clause of the NDA. In the fast-paced industrial- and technology-centered worlds, a clause should ideally be incorporated for the return of any confidential information, as it is bound to lose value over time.
  • Carefully stipulate the intention behind the NDA: This ensures that parties define what they want to share and what they do not intend to share. If the NDA deals with Intellectual Property Rights, the disclosing party must be aware of their clear intention behind making any disclosures.
  • State laws: It is the duty of the parties to ensure that all provisions in the NDA comply with their respective state laws. An equally important area of focus in which state's law will be applicable if both parties are from different states.
  • Miscellaneous: Details such as who pays legal fees in case of disputes, the manner of resolving disputes, whether a court trial is the only way out, or mediation/arbitration can be followed for a quicker and economically viable alternative - all come under miscellaneous details.

Several federal and state laws in the U.S. recognize the validity of an electronic signature. The Federal Electronic Signatures in Global and National Commerce (ESIGN) Act applies to documents that deal with interstate or foreign transactions. Furthermore, most states have adopted the Uniform Electronic Transactions Act (UETA) for electronic signatures on documents that are not covered by the ESIGN Act. The UETA in particular covers documents used in "transactions between parties," which includes NDA and other legal agreements. Some limitations, however, exist on the use of electronic signatures. 

Under the UETA, these are:

  • Mutual agreement between both partners to use the electronic signature format
  • Documents that require in-person notarization or specific legal instruments - such as wills, codicils, and testamentary trusts - are not covered by the UETA.

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