# Non-Disclosure Agreement (NDA) Explained, With Pros and Cons

> **Definition**
>
> A non-disclosure agreement is a legal contract that protects confidential information by preventing those who sign it from disclosing the information to others.

## What Is a Non-Disclosure Agreement (NDA)?

A non-disclosure agreement (NDA) is a legally binding contract that establishes a confidential relationship between two parties: one that holds sensitive information and the other that will receive that sensitive information.

The latter agrees that the information they receive won't be made available to others. An NDA is also referred to as a confidentiality agreement.

Non-disclosure agreements are common for businesses entering into negotiations with other businesses.

They allow the parties to share sensitive information without fear that it will end up in the hands of competitors. It may be called a mutual non-disclosure agreement in this case.

### Key Takeaways

*   An NDA acknowledges a confidential relationship between two or more parties and protects the information they share from disclosure to outsiders.
*   The NDA is commonly implemented before discussions between businesses about potential joint ventures begin.
*   Employees are often required to sign NDAs to protect an employer's confidential business information.
*   An NDA may also be referred to as a confidentiality agreement.
*   Mutual and non-mutual agreements are two primary types of non-disclosure agreements.

![Non-Disclosure Agreement (NDA)](https://www.investopedia.com/thmb/J8DhyqDJiZtjb3oOcbPEyA5aLxo=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Term-Definitions_NDA-438a26fefa014d06b83b75b02d8403a6.jpg)

*Violating an NDA can lead to legal action, including lawsuits. — Investopedia / Tara Anand*

## Understanding Non-Disclosure Agreements (NDAs)

The NDA serves a purpose in a [variety of situations](https://www.investopedia.com/articles/investing/041315/how-ndas-work-and-why-theyre-important.asp). NDAs are generally required when two companies enter into discussions about [doing business together](https://www.investopedia.com/articles/personal-finance/090815/basics-business-development.asp) but want to protect their interests and the details of any potential deal.

The language of the NDA forbids all involved from releasing information regarding any business processes or plans of the other party or parties.

Some companies also require that new employees sign NDAs if they have access to sensitive information about the company.

Some companies require all employees to sign an agreement while others require only certain employees, e.g., those in select departments, to sign them.

NDAs may also be implemented before discussions take place between a company seeking funding and potential investors. The NDA is meant to prevent competitors from obtaining their [trade secrets](https://www.investopedia.com/terms/t/trade-secret.asp) or business plans in such cases.

Many investors are reluctant to sign NDAs, however. Not only will this potentially prevent them from sourcing future deals with other companies but the agreement may be very difficult to enforce in proving wrongdoing.

Most investors simply won't sign the agreement so as to avoid being burdened by a legal contract even after declining an investment opportunity.

The information that's being protected may include a [marketing strategy](https://www.investopedia.com/terms/m/marketing-strategy.asp) and sales plan, names of potential customers, details about a manufacturing process, or proprietary software.

If an NDA is breached, the initiating party may seek court action to prevent any further disclosures and sue the offending party for monetary damages.

## Types of NDAs

NDAs come in various forms, each providing for different rules and purposes.

### The Mutual Agreement

Consider a situation where two businesses are discussing the possibility of partnering. As part of strategic discussions, each company may disclose information about its [operations](https://www.investopedia.com/terms/o/operations-management.asp) to better inform the other side of its capabilities.

In such situations, both parties often agree to share no information with others—the agreement is mutual.

### The Non-Mutual Agreement

This type of agreement is also referred to as a unilateral NDA. It usually applies to new employees who have access to sensitive information about the company.

The employee is the only party signing the agreement and is prevented from sharing confidential information in such cases. They are the only one bound to confidentiality because they're the only party receiving sensitive information.

### The Disclosure Agreement

Increasingly, individuals are asked to sign the opposite of a non-disclosure agreement. A doctor may require a patient to sign a disclosure agreement that allows the doctor to share the patient's medical details with an [insurer](https://www.investopedia.com/terms/h/healthinsurance.asp).

The disclosure agreement provides the doctor with the authority to share personal information and prevents them from being sued for doing so.

> **Fast Fact**
>
> An NDA is a legally binding contract. A violation can lead to legal penalties.

## Requirements for an NDA

NDAs can be customized for any situation but six major elements are generally considered essential to any non-disclosure agreement.

### 1\. Participants in the Agreement

Every non-disclosure agreement must specifically designate each party involved. The individual receiving the sensitive information can be a specific person, all employees of another specific company, or any representative of the company.

It's very important for a company to appropriately define itself in an NDA. Consider companies with complex legal structures.

The company must determine which legal entity has ownership of the information. In many cases, a company may simply list any legal entity under a broad ownership umbrella.

### 2\. Definition of Confidential Information

An NDA must state the information that is considered to be confidential. This information is often very difficult to define appropriately.

A company can't simply assume that everyone will understand what is proprietary information. It's the company's responsibility to identify the information that must not be shared.

The difficulty with defining confidential information is the process of not disclosing such information itself within the NDA. Companies may broadly assign confidentiality to a large group for this reason.

For example, a company might state that any information disclosed from or regarding its [research and development](https://www.investopedia.com/terms/r/randd.asp) department is confidential.

### 3\. Exclusions of Confidentiality

It may just be easier to define what's not confidential in some situations. A company might state that all information shared with an external party is to be confidential except for specific items that are determined by that company.

These types of agreements intend to allow a company to catch any exceptions that otherwise could slip by.

### 4\. Appropriate Uses of Information

A company may sometimes state that no information is confidential or it may simply limit how the external party may use the information that's been given to them.

For example, a company may be fine disclosing operating processes to another party but that party can't share the information with a competitor or replicate it for personal financial benefit.

### 5\. Time Period

Many proprietary bits of information simply expire or become less valuable over time, especially those relating to research and development,

Consider the early days of [Apple iOS](https://www.investopedia.com/terms/a/apple-ios.asp). Many components of the operating system were unknown and the technology was widely a mystery.

Much of that information has been replicated by other companies or adapted into newer technologies. What was once sensitive information may not be so any longer. Companies often define when the information is no longer confidential.

### 6\. Other/Miscellaneous Provisions

Various industries may have differing requirements and government agencies often have more stringent requirements for keeping sensitive information private.

An NDA may also detail applicable state law or laws that apply to the agreement and which party pays attorney fees in the case of a dispute.

It may also define the course of action to be taken if the agreeing party fails to comply with the terms.

> **Important**
>
> Many states have their own NDA requirements. You should always seek legal counsel before entering into any NDA agreement.

## Information Protected With an NDA

Companies use NDAs to protect information that includes but is not limited to:

*   **Customer information:** This includes major customers, major customer contact information, and customer preferences. It might also include any direct communications with customers.
*   **Financial information:** This includes specific financial information relating to any customer or any financial information that's not required to be publicly disclosed. This type of information is often more related to cost accounting rather than financial accounting.
*   **Intellectual property:** This includes patents, [copyrights](https://www.investopedia.com/terms/c/copyright.asp), trade secrets, technologies, and anything a company uses as a competitive advantage.
*   **Marketing information:** This includes processes, billing policies, pricing strategies, and advertising techniques.
*   **Operating information:** This includes employee data, supplier information, any information that's related to payroll, or any aspect of internal costs that are required to operate the company but not required to be publicly disclosed.

## Exclusions to NDAs

NDAs can't contain specific information that is common knowledge or already in the public domain. There can be disagreement about how this is defined.

However, it includes information that becomes publicly known at no fault of the signer of the NDA and/or that pertains to illegal activity. Both are contrary to public policy.

Information that the signer of the NDA already knows before receiving the agreement can't be included in the agreement.

Information that could be determined via independent research or rightfully obtained from a third party can't be defined as confidential, either.

> **Fast Fact**
>
> Make sure that confidential information and trade secrets are distinguished from each other when you're entering into a non-disclosure agreement. The latter usually has an indefinite period of confidentiality.

## Advantages and Disadvantages of NDAs

### Advantages

The primary benefit of an NDA is that sensitive information regarding your company is kept secret. This can be anything from research and development (R&D) to possible future [patents](https://www.investopedia.com/terms/p/patent.asp), finances, and negotiations.

Signing an NDA is a way to keep private information from becoming public.

NDA agreements are also clear. To avoid any confusion, they specify what can and can't be disclosed.

NDAs can be created at a low cost as they're just a signed piece of paper. This is one of the most cost-effective ways to maintain private information.

NDAs also outline the consequences of disclosing prohibited information and this should prevent any leaks.

NDAs are a good way to maintain comfort and trust in a relationship as well.

### Disadvantages

One of the primary disadvantages of an NDA agreement is that it starts a relationship out on the idea of mistrust. This can set the tone of the relationship and it may not always be positive.

Employee NDAs can prevent top-tier talent from joining your firm because such prospects know they'd be limited in how they can discuss their jobs.

Asking current employees to sign NDAs when they're working on special projects might sour their experience of working for the company because they feel less trusted.

NDAs can also result in potential lawsuits if breached and this would become a headache for everyone involved.

Pros

*   Information is kept private
    
*   Provides clarity on what information can and cannot be shared
    
*   Low cost to create
    
*   Outlines consequences
    

Cons

*   Can create an atmosphere of mistrust
    
*   Risk of deterring top-tier talent from joining the firm
    
*   Can sour the relationship with current employees
    

## Example of an NDA

[Apple](https://www.investopedia.com/apple-stock-aapl-5075819) is one of the most private companies in the world. It keeps its technology and future products closely guarded until it's ready to release them.

The idea is to deter competitors from stealing trade secrets and copying its [products](https://www.investopedia.com/how-apple-makes-money-4798689) because it's been a pioneer in technology for most of its existence. As a marketing ploy, keeping a lid on exciting and important information also generates buzz.

CNBC reported in January 2021 that carmaker Hyundai confirmed in a statement that it was in talks with Apple regarding cars. This, of course, raised suspicion that Apple was possibly entering the car market or creating a product related to automobiles. Hyundai then released a follow-up statement that removed any mention of Apple.

Apple insists on secrecy in all its relationships and it requires that any partner sign an NDA. Apple tells its partners that they can't mention the name Apple in any manner. It has threatened partners that have leaked information with monetarily hefty lawsuits.

## What Happens If You Break a Non-Disclosure Agreement?

You'll be susceptible to the consequences outlined in the contract. It's not usually considered a crime but it can be depending on what was violated, such as if the issue is theft of trade secrets.

An individual will typically be sued if they break an NDA, which can result in a monetary fine, termination of employment, or the return of an asset. You may also be sued for intellectual property violations such as copyright infringement or breach of fiduciary duty. A court can levy financial damages and associated legal costs.

## How Long Does an NDA Last?

Every NDA is unique so each can last a different amount of time. Common timeframes range from one year to 10 years, however, depending on the information that's to be kept private. An NDA can also be indefinite. But to be enforceable in some states, it must not be too open-ended or generic. The courts could throw it out.

## How Much Does an NDA Cost?

The cost of an NDA can vary depending on its complexity. It can range from free (use a template available online) to over $1,000 (if you have a lawyer create it).

## What Is an NDA Template?

An NDA template is a non-disclosure agreement format that an individual or company can follow to create their own NDA. The template will have the general legal information and blanks that can be filled in to create a unique NDA between two or more parties that applies to their relationship.

NDA templates can be easily found online through an internet search. Many sites offer NDA templates for use.

## The Bottom Line

Non-disclosure agreements are low-cost, easy-to-create, legally binding documents between two or more parties that keep valuable information confidential.

They're used by organizations and individuals to protect their businesses or personal information and allow businesses to work together without fear of private information falling into the hands of competitors.

It's important to be as detailed as possible when you're drafting an NDA so all parties know what can and cannot be shared as well as the consequences of leaking information.  

> **Article Sources**
>
> 1.  National Whistleblower Center. "[Non-Disclosure Agreements and Whistleblowers](https://www.whistleblowers.org/non-disclosure-agreements-and-whistleblowers/)."
>     
> 2.  CNBC. "[Hyundai Motor Says it’s in Early Talks With Apple to Develop a Car, Sends Shares Soaring 19%](https://www.cnbc.com/2021/01/08/hyundai-motor-says-it-is-in-early-talks-with-apple.html)."
>     
> 3.  CNBC. "[Doing Business with Apple Means You Probably Can't Tell Anyone About It, As Hyundai Learned](https://www.cnbc.com/2021/01/14/apple-insistence-on-secrecy-bites-hyundai.html)."
>     
> 4.  Wood Litigation. "[Are Non-Disclosure Agreements Enforceable in California?](https://www.woodlitigation.com/blog/2020/december/are-non-disclosure-agreements-enforceable-in-cal/)"
>     
> 5.  LegalZoom. "[What Is an NDA? Non-Disclosure Agreement Types and Uses: How Much Does an NDA Cost?](https://www.legalzoom.com/articles/understanding-non-disclosure-agreements#:~:text=The%20cost%20of%20an%20NDA,incur%20additional%20costs%20over%20time.)"