A non-disclosure agreement (NDA) is a legally binding contract in which a person receiving confidential information agrees to protect that information by not revealing it to other parties. NDAs can be mutual, with both sides revealing confidential information, or more commonly one-way, in which only one side gets confidential information.

Non-disclosure agreements are common in some employment contracts, especially in high-tech fields.

How Non-disclosure Agreements Protect You

Non-disclosure agreements are important for protecting information that gives a company a competitive advantage over the rest of the market. This information is called a trade secret and can range from secret recipes or manufacturing processes to client lists or sales plans.

Trade secrets are often the main ingredient in a company's success, so it doesn't want this information becoming part of the public domain. But trade secrets are only protected if the owner actively takes steps to protect them. This is where the NDA comes in.

A non-disclosure agreement also creates a confidential relationship between the person(s) with the secret and the person to whom the secret is disclosed.

What Non-disclosure Agreements Cover

A standard NDA contains at least five important pieces of information:

A definition of the term "confidential information" for the purposes of the specific NDA: This sets boundaries on what information is considered confidential without actually giving away the information. For example, the recipes used in a restaurant are confidential.

What, if any, of the information is excluded from confidentiality: There are usually laws specifying exclusions to confidentiality.

The obligations of each party to the NDA: The NDA should spell out how both sides should protect the confidential information. Many states have laws detailing the duties and obligations of parties to an NDA. It can also set limits on use of the information.

How long the NDA will be enforceable: The NDA might last for a set number of years or it might expire with some event, for example, when a product hits the market.

Any other provisions: These are also usually mandated by state law. Examples might be the consequences for breaching an NDA and arbitration clauses.

Using Non-disclosure Agreements when Seeking Funding

If you are trying to secure funding to manufacture or market your invention, one option is to pitch your idea to venture capitalists (VC), who may agree to finance your operation in exchange for a stake in the company. It is a good idea from your perspective to have them sign an NDA before hearing your pitch, but most will probably refuse.

Although you might believe your idea is unique, there are probably others with very similar ideas, and they may be pitching those ideas to the same VCs as you are. A VC who funds one startup could be accused of breaking an NDA by another startup with a very similar idea. To avoid this situation, VCs often refuse to sign NDAs.

If your company has trade secrets, and most do, it's up to you to protect them. If you have not taken steps to protect them, then you cannot take action against anyone who reveals them.