Does my company need a non-disclosure agreement?
As a director, shareholder, or both in a limited company, you likely operate in a competitive environment where safeguarding sensitive business information can be key to your success. To protect critical details about your operations, businesses often rely on non-disclosure agreements (NDAs).
In this article, we’ll explore the purpose of NDAs and help you determine whether your company should use them. Let’s explore!
What is a non-disclosure agreement?
Often called a confidentiality agreement, a non-disclosure agreement (NDA) is a legal contract between at least two parties that limits the sharing of confidential information with others. It can function as a standalone agreement or form part of a broader contract.
By signing an NDA, the signatory agrees to keep the disclosed information confidential.
NDAs are typically used to safeguard sensitive information, including:
- Intellectual property (IP)
- Research
- Ideas
- Business plans
- Technical data
- Personal data (related to employees and clients)
- Financial details
- Ongoing negotiations
In the UK, there are generally two types of NDAs:
- One-way NDAs: Used when only one party shares confidential information.
- Mutual NDAs: Applied when both parties share confidential information.
If someone breaches an NDA and the case goes to court, the party responsible for disclosing or misusing the confidential information may face significant financial penalties, including compensation for lost profits.
When your company should use an NDA
Assuming that a discussion between two parties will remain private can be a critical mistake, even if the subject matter feels inherently confidential. Before entering any business conversation, carefully consider whether the information you plan to share could expose you or your company to risks—whether commercial or related to security.
If sharing such information poses any potential vulnerability, it’s wise to have a solicitor draft a non-disclosure agreement (NDA). Ensure all parties sign this agreement before proceeding with any discussions.
While the simple advice to “keep it to yourself” might seem practical, it’s often unrealistic in business. This is especially true for companies that are just starting out or seeking to grow, as collaboration and information-sharing are key to success.
Scenarios when your company may need a non-disclosure agreement
- Partnering with Another Company
When entering a business relationship with another company—whether as a customer, supplier, or partner—sensitive information will likely be shared. To ensure this information stays confidential, a non-disclosure agreement (NDA) is essential.
Example: Imagine you’re developing a new service to expand your offerings. Before the launch, you need to inform an existing partner so they can prepare their marketing strategy. To prevent competitors from discovering your plans, having your partner sign an NDA is a reasonable precaution.
- Seeking Investment or Business Advice
Securing investment or professional advice often requires revealing critical details about your business. Before sharing sensitive information with banks, accountants, or potential investors, an NDA should be in place to protect your business.
Example: Your startup needs funding, and you’ve scheduled meetings with several investors. During these discussions, you’ll need to disclose confidential details like your business plan, financial records, and staff information. Drafting and signing separate NDAs with each investor ensures that your information remains protected.
- Engaging Service Providers
As your business grows, outsourcing services may become necessary. However, providing these services often requires access to sensitive information that you don’t want to be misused.
Example: Your company hires a digital marketing consultant to manage an ongoing email campaign. To execute this, you must share a list containing your clients’ personal data. Before doing so, you should have the consultant sign an NDA to guarantee they won’t misuse the data for personal gain.
- Protecting Information from Employees
NDAs aren’t just for external parties—they can also apply to your employees. Employees, after all, possess extensive knowledge of your business operations. In some cases, even candidates might be required to sign an NDA during the hiring process.
Example: You’ve developed a groundbreaking product that’s generating significant buzz. As your company expands, you hire new employees who need to understand your intellectual property to perform their roles. To prevent them from using this knowledge to start a competing business, you can require them to sign an NDA.
What information does a non-disclosure agreement need to include?
A non-disclosure agreement (NDA) is a legal contract that must include specific statements written with precision to ensure its enforceability.
For this reason, we strongly advise against drafting your own NDA. A poorly written agreement may lack legal validity, rendering it ineffective.
Instead, consider using a professionally created template – many of which are available online for free – or, if possible, consult a solicitor to draft one tailored to your needs. While costs may vary, a professionally drafted NDA ensures that all critical elements are included.
In addition to the legal clauses required for enforceability—such as those outlined in this GOV.UK example agreement – an NDA should also contain the following details:
- Name of the individual(s) or company receiving the information.
- Address of the individual(s) or company receiving the information.
- Name of the individual(s) or company disclosing the information.
- Address of the individual(s) or company disclosing the information.
- Reason for sharing the confidential information.
- Timeframe for maintaining confidentiality (commonly three, five, or ten years).
- Signatures of all parties involved, along with the signatures of witnesses.
By ensuring these details are included, your NDA will provide the necessary legal protection for your sensitive information.
When your company should not use a non-disclosure agreement
A non-disclosure agreement (NDA) cannot prevent someone from:
- Whistleblowing.
- Reporting a crime to the relevant authorities.
Similarly, as highlighted by The Advisory, Conciliation and Arbitration Service (ACAS), NDAs should not be used to:
- Stop someone from reporting discrimination, harassment, or sexual harassment.
- Cover up inappropriate behavior or misconduct, especially when there’s a risk of recurrence.
- Avoid addressing workplace disputes or problems.
- Mislead or deceive someone.
NDAs are not universal contracts; they require customization for each use. Every agreement must reflect specific details, such as the nature of the confidential information being shared. If a professional is drafting or tailoring the agreement for you, as recommended, this may incur additional costs.
Therefore, it’s essential to be judicious when using NDAs. Before sharing sensitive information, assess whether your meeting or discussion can proceed effectively without disclosing confidential details. If that’s not feasible, use an NDA to safeguard your interests.
For internal matters, while there are legitimate scenarios where employees may need to sign NDAs (as outlined earlier), consider whether doing so could negatively impact your relationship with your team. Overusing NDAs in such contexts might harm company culture and trust.
FAQs About Non-Disclosure Agreements (NDAs) for Companies
What is a non-disclosure agreement (NDA)?
A non-disclosure agreement is a legal contract that ensures parties keep shared sensitive information confidential. NDAs protect business details like intellectual property, financial data, or client lists from being disclosed without permission.
When should a company use an NDA?
Companies should use NDAs in situations where sensitive information is shared, such as:
- Partnering with another business.
- Seeking investments or professional advice.
- Hiring service providers.
- Protecting intellectual property from employees or candidates.
What types of NDAs exist?
Two common types of NDAs include:
- One-way NDAs: Protect information shared by one party.
- Mutual NDAs: Safeguard information shared by both parties.
What information should an NDA include?
An NDA must clearly specify:
- The parties involved.
- Addresses of the parties.
- The purpose of sharing confidential information.
- The confidentiality timeframe (e.g., three to ten years).
- Signatures of all parties and witnesses.
When should a company avoid using an NDA?
Companies should not use NDAs to:
- Prevent whistleblowing or reporting crimes.
- Suppress discrimination or harassment claims.
- Conceal misconduct or avoid resolving disputes.
Can you draft an NDA yourself?
While you can use free templates, a solicitor should ideally draft or review your NDA to ensure its legal enforceability and suitability for your situation.
What happens if someone breaches an NDA?
Breaching an NDA can result in significant legal and financial consequences, including compensation for lost profits or damages.
Should employees sign NDAs?
In some cases, yes. For instance, employees working with proprietary or confidential information may need to sign NDAs to protect the company’s interests. However, overusing NDAs with employees can harm trust and workplace culture.
Do you have any other questions?
This overview explains when and how non-disclosure agreements (NDAs) can protect your company’s sensitive information. Whether collaborating with partners, seeking investment, or engaging service providers, NDAs serve as a safeguard for your business interests. However, using NDAs responsibly is crucial to maintaining trust and adhering to legal and ethical standards.
For more information, visit the Startxpress Help Center and the Startxpress Blog. If you have any questions, feel free to reach out to us at support@startxpress.io!
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