A step-by-step tutorial: how to write an NDA to secure your business
Non-disclosure agreements (NDAs) have become a standard in business today. In fact, just over one-third of U.S. workers are required to sign an NDA of some kind, according to a recent analysis.
These contracts, also known as confidentiality agreements, are written agreements that prohibit parties from sharing information that is confidential.
If you’ve got questions on how to create a non-disclosure agreement, we will address them below, offering insider tips along the way so that your NDA will be robust and protective.
How to write an NDA
- Types of NDAs
- What’s included in a non-disclosure agreement?
- Introduction
- Confidential information
- How to handle confidential information
- Non-confidential information
- Obligations of the receiving party
- Duration of the agreement
- Resolving disputes
- Finalizing the NDA
- Non-disclosure agreements vs. non-compete agreements
- Easy NDA templates
Types of NDAs
While most general non-disclosure agreements contain the same basic information, you may need a specialized NDA based on the relationship between the parties sharing confidential information.
Here are a few types of generic non-disclosure agreements you may need as a business owner.
1. Patent/product development NDA
A patent-focused non-disclosure agreement allows the company to retain all confidential information regarding their patents or inventions.
This can be useful for startups or established businesses that do not want employees, vendors, or other third parties sharing information about your patent.
Similarly, product development NDAs protect sensitive information regarding a new product before a patent has been filed.
2. Employee NDA
This type of confidentiality agreement informs an employee that he or she may not divulge sensitive information or trade secrets without the employer’s permission.
Even if you’re unsure what may qualify as confidential information, having employees sign an NDA before joining the company sets a good privacy standard.
Like employees, independent contractors may also be exposed to proprietary information. These 1099 employees should sign an NDA before beginning their work, just like regular employees.
3. Job interview NDA
If your talent acquisition team is interviewing for a sensitive job, consider drafting a job interview NDA.
Interviewers may divulge sensitive information when they ask prospective employees questions during an interview. Employees who are hired typically sign NDAs, but what about those who didn’t get the job?
Because unhired interviewees may be exposed to confidential information, draft a simple NDA that each person must sign before the interview begins.
4. Mutual NDA
These legal documents, also known as two-way NDAs, allow for two different parties to share their trade secrets. However, these two entities are still bound to keep the information flowing between parties private.
5. Customer List NDA
If your company sells its customer lists to third parties, you’ll want to make sure that file doesn’t get into your competitors’ hands.
Draft a customer list non-disclosure agreement and have the third party sign it before turning over this potentially lucrative information.
6. Business plan NDA
Perhaps you need to start attracting investors for your business. The business plan non-disclosure agreement comes in handy here, as it will keep the details of your business plan secure after you pitch investors.
This type of NDA can also be helpful for startups that need to show a third party the details of their business plan to receive funding, for instance.
7. Business sale NDA
On the other hand, maybe you’ve finally grown your business to the point you want to sell it. Now’s the time to whip out a handy business sale NDA.
This confidentiality agreement is useful for keeping trade secrets and business information private during negotiations such as mergers, investment discussions, potential joint-venture negotiations, and the final sale of a business.
What’s included in a non-disclosure agreement?
Now that you know about the different types of NDAs, it’s time to draft your very own legal contract.
Most standard NDAs follow this format:
- Introduction
- Definition of confidential information
- How to handle confidential information
- Exclusions from confidential information
- Obligations of receiving party
- Duration of agreement
- Resolving disputes
- Integration
- Choice of law
- Signature page with notarization
Easy enough, right? These sections are pretty self-explanatory, so you surely know what each of them should entail, don’t you?
Just kidding – we’ll break down each of these sections so that by the time you’re finished, you’ll know an NDA like the back of your hand.
01. Introduction
First and foremost, you’ll need to add an explicit title to the generic non-disclosure agreement. It can be as simple as “Non-Disclosure Agreement” or something more specific, such as “Product Development Non-Disclosure Agreement.”
You’ll also need to list the disclosing party, receiving party, and the purpose of the contract in the unilateral NDA. The disclosing party is the person who is disclosing confidential information.
The receiving party is the person who receives this information and is bound to keep it secret. Of course, the purpose of the contract is to prevent the disclosure of sensitive information.
Here’s a sample of what your standard NDA introduction should look like:
This Non-Disclosure Agreement (the “Agreement”) is entered into by and between ________________ (the “Disclosing Party”) and ______________ (the “Receiving Party”) for the purpose of preventing the unauthorized disclosure of Confidential Information as defined below. The parties agree to enter into a confidential relationship in regards to the disclosure of certain proprietary and confidential information (“Confidential Information”).
If both sides signing the NDA are disclosing confidential information to each other, the NDA should be adjusted to be a mutual non-disclosure agreement. In this case, the introduction would read as follows:
This Non-Disclosure Agreement (the “Agreement”) is entered into by and between _________________ (Party A) and _______________ (Party B) collectively referred to as “the parties” for the purpose of preventing the unauthorized disclosure of Confidential Information defined below. The parties agree to abide by a confidential relationship in regard to the disclosure by one or each of the parties of certain confidential information.
02. Confidential information
Following the introduction, you will need to define what confidential information is protected by the legal contract.
Depending on your business, you may have several classes of information that would be considered trade secrets or otherwise confidential information.
A trade secret is defined as intellectual property that has economic value precisely because this information is not public knowledge. Trade secrets can include everything from formulas and processes to practices, designs, and instruments.
For example, Coca-Cola’s recipe for the Coca-Cola Classic soft drink is a trade secret, as the specific formula has led to the soda’s market dominance both in the United States and across the globe. If everyone had access to this recipe, Coca-Cola’s profits would be diminished as competitors ripped off their secret formula.
No doubt, anyone who has access to this prized recipe is bound heavily by strict NDAs.
Types of information protected by NDAs include but are not limited to:
- Standard Operating Procedures (SOPs)
- Formulations
- Technical information
- Financial information
- Architectural drawings
- Design blueprints
- Specialized tools
- Product specifications
- Prototypes
- Test results
- Software
- Customer lists
- Vendor lists
- Business methods
- Marketing strategies
- Technical know-how
- Medical information
Chances are if you’re making money off something the public domain isn’t aware of, you’d benefit from writing your own NDA.
Your confidential information clause may resemble the description from PandaDoc’s free sample NDA:
“Confidential Information” means information, to the extent it is not a Trade Secret, which is possessed by [Disclosing Party] and which relates to [Disclosing Party], including, without limitation, for example: business plans, strategies, existing or proposed bids, costs, technical developments, financial or business projections, investments, marketing plans, or training information, materials, and examples of confidential information.
03. How to handle confidential information
Now that you’ve detailed the confidential information within the legal document, you should state how the proprietary information should be handled.
Depending on who is designated as the receiving party, this may include researching the party’s confidentiality practices.
If you’re binding an employee to an NDA, this may not be necessary. However, if you’re divulging confidential information to a third party such as a potential partner or vendor, you’ll want to do your homework on how the organization handles confidentiality.
Next, define the standard of care.
This is essentially how strict of standard the confidential information should be handled. Generally, NDAs list “commercially reasonable” or “in strictest confidence” to avoid negligent or willful divulgence of trade secrets.
The degree of standard of care will depend on the confidential information you are protecting. In Coca-Cola’s situation, we can easily assume anyone who has access to the prized formula is bound under the “in strictest confidence” standard of care.
An employee who must work with a partner or vendor may be held to the “commercially reasonable” standard of care, so they can share aspects of the confidential information that helps accomplish business-related objectives.
04. Non-confidential information
After you’ve explicitly discussed what information is protected and how it should be handled, the NDA is obligated to outline non-confidential information.
This may seem redundant, but is needed for clarity. Sticking with the Coca-Cola case, an example of non-confidential information would be the company’s bottling process.
Coca-Cola doesn’t make money off how it fills its bottles, but rather it’s what’s inside that counts.
05. Obligations of the receiving party
Next, it’s time to discuss the obligations of the receiving party.
This section describes how the receiving party must maintain the information’s confidentiality and limit its use. You’ll want to specify on what conditions the receiving party may reveal protected information.
This may be under no circumstances, or under special circumstances where the receiving party may need to work collectively with another party for business purposes.
If your NDA is a mutual agreement or more complicated, then you’ll want a long-form statement describing the obligation of the receiving party.
This may include requiring the return of all trade secret documents or the prohibition against practices that may leak confidential information to undesired parties.
04. Duration of the agreement
Another important component of a non-disclosure agreement is the time period of the disclosure of information and confidentiality.
First, detail the time period information sharing. This could be while the NDA is active or during the first few months of the relationship between the receiving and disclosing party.
This section will depend on the purpose of the NDA and the parties’ objectives.
Next, determine the effective date of the NDA, and how long the duty of confidentiality lasts. Generally, you’ll have three options: a fixed period of time, in perpetuity, or an indefinite period of time.
You may choose a fixed period of time by specifying that the agreement will be active until a certain date. If you want rock-solid confidentiality, opt for the in perpetuity duration.
This binds the receiving party from divulging protected information under any circumstances in the future.
For an indefinite period of time, you may state that the NDA is active until 1) the disclosing party decides to end the agreement or 2) the confidential information no longer qualifies as a trade secret because it has become part of the public domain.
06. Resolving disputes
You’ve laid the groundwork for most of the nitty-gritty NDA details. Now, it’s time to address disputes.
Although the purpose of an NDA is to avoid breaches in confidentiality, these things happen. In your standard NDA, you’ll want to discuss what the remedy is for a potential breach of contract and possible legal action.
Remedies can include but are not limited to money for damages, a predetermined fine amount, a court order known as an injunction, loss of employment, and the entitlement to attorney’s fees spent on enforcing the legal contract.
Be careful, though, of specifying an amount of money for damages. Some courts may refuse to enforce damages that are considered to be too high, and damages set too low may not protect your trade secrets securely.
It is also wise to consider adding an alternative dispute resolution clause. This section basically requires both parties to come together privately, whether through a casual meeting or official mediation, to resolve disputes.
Why is an alternative dispute resolution necessary?
For one, court proceedings are public information. Many businesses would prefer disputes to be discussed in private rather than sharing these proceedings with the world.
Another good reason to consider an alternative dispute resolution clause is for ease and efficiency.
Depending on where you file a court order, getting a hearing scheduled and a final decision could take weeks if not months. Alternative dispute resolutions allow for a more speedy and flexible time frame as compared to litigation.
07. Finalizing the NDA
While all of the aforementioned information is great, the document doesn’t mean anything until your NDA is properly finalized. Follow these easy steps to ensure your NDA is considered a legally binding contract.
1. Integration clause
In the simplest terms, the integration clause verifies the signed copy of the NDA is the final version.
This clause ensures that parties cannot rely on past statements once the NDA is signed. Furthermore, the integration clause may also stipulate that changes to the agreement may only be valid if they are presented through an addendum. An addendum is an official signed agreement finalized after the initial NDA was signed.
2. Choice of law
Next, specifying the choice of law in your NDA is critical.
This designates which state law applies to the non-disclosure agreement if a lawsuit should develop. The easiest way to do this is to list that the agreement shall be governed by the laws of the state you work in.
3. Signature block
Once you’ve got the integration and choice of law formalities out of the way, it’s time to make room for signatures.
Each person signing the NDA should have their own signature block. Include a line for the signature, the printed name of the party, and the date the NDA was signed.
4. Notarization
Finally, make sure your NDA is signed before a notary.
A notary public is a government-appointed official that witnesses the signing of important documents. Notaries verify the identity of signers and their awareness of the details of the contract.
When drafting your notary section, be sure to include a line for the notary’s signature, the notary ID number, and the notary license expiration date.
Non-disclosure agreements vs. non-compete agreements
While non-disclosure agreements bind parties from sharing trade secrets and other confidential information, it isn’t the only document that can give your business a competitive advantage. Enter, the non-compete agreement.
What is a non-compete agreement? This legal contract restricts employees or partners from competing in your industry during the business relationship or after it ends.
Many companies issue non-compete agreements to prevent their employees or former employees from jumping ship and signing on with their competitors.
You may want to consider adding a non-compete clause to your NDA if the benefits of a non-compete sound tempting.
Including a non-compete clause streamlines your business’ competitive advantage.
Your employees or strategic partners will be fully aware of what they can and cannot do with your confidential information during your business relationship or after it’s ended.
If you do decide to include non-compete language in your NDA, be sure to include this in the title of your document to avoid confusion.
This can be as easy as listing “Non-Disclosure Agreement and Non-Compete Agreement” at the top of your document.
Easy NDA templates
Don’t worry if learning how to create a non-disclosure agreement still seems intimidating. PandaDoc has excellent free non-disclosure agreement samples and templates to give you a good idea of what the completed document should look like.
Writing a non-disclosure agreement doesn’t have to be stressful. If you’re feeling a little overwhelmed about writing your own NDA, consider PandaDoc’s easy-to-use NDA templates.
Hiring a law firm to draft an original NDA can be expensive. Utilizing PandaDoc’s NDA template is a quick and compliant way to ensure your company’s confidential information is protected. Let PandaDoc do the legwork while you rest assured your confidential information is protected.
Download the free printable confidentiality agreement form by PandaDoc today to see just how easy it is to draft your own NDA.
