Non-Disclosure Agreements: NDAs in Business Negotiations
The success of many business owners is dependent on the manner in which they approach relationships with other businesses and entrepreneurs. While a business professional should be as good as his or her word, and a handshake should still carry significant meaning, it is more important than ever that most agreed-upon details should be formalized in writing, especially in significant business transactions. For a large number of transactions, the first step is often a non-disclosure agreement, or NDA, designed to protect a company’s professional interests.
What is a Non-Disclosure Agreement?
A non-disclosure agreement, also known as a confidentiality agreement, is a document that protects against the dissemination of confidential information. While NDAs have many applications, they are particularly useful in pending or proposed business transactions, including the sale or purchase of a company, a merger, or private financing arrangements. For example, if you engage in discussions with another company in your industry regarding the possibility of a merger, it may not be in your best professional interests to allow the knowledge of that interaction to reach the newspapers or other companies. A non-disclosure agreement may be developed, with the help a qualified business lawyer, to protect you from the unintended consequences of such a discussion.
Types of NDAs
There are two basic types of non-disclosure agreements, based upon the intended application of the agreement. With a one-way NDA, or a unilateral NDA, only one party is bound to maintain confidentiality of the specified information. A unilateral NDA may be used, for example, to prevent potential investors from releasing your company’s information, with no reciprocating requirement for you to keep the investors’ information private.
The second type of NDA is known as a mutual NDA, and is designed to protect the interests of both parties in the potential or actual transaction. A mutual NDA is often best suited for situations in which the dissemination of either party’s information could negatively impact the business or the industry, such as the example of two companies considering a merger.
Primary NDA Elements
While non-disclosure agreements can become relatively complex with a large number of details, certain considerations must be included in order to make the NDA functional. The most important element is the definition of exactly what information is to be protected under the NDA’s terms. Since a non-disclosure agreement is meant to protect against the disclosure of confidential information, what constitutes such information must be clearly designated. Many NDAs address product specifics and trade secrets, but others may cover financial records and long-term capital improvement plans. Still others may include all of those concerns together.
The term of the NDA should also be established. It is unreasonable to expect another party to remain contractually bound to your company forever. The length that an NDA will remain in force is variable based on the concerns of each party, but terms are generally five years or less.