4 Ways to Use Non-Disclosure Agreements (NDA) to Protect Your Small Business

​Once reserved for large corporations and technology pioneers, non-disclosure agreements (NDAs) are becoming more common across all business types, sizes, and industries.

In an era where business trust is at an all-time low, even among fellow companies, businesses are using NDAs both internally and externally to protect their interests. Daliah Saper, intellectual property attorney explains,

​“If you are like most businesses you have developed, acquired, or painstakingly aggregated proprietary information that gives you a competitive advantage. You don’t want anyone else to know your ‘secret sauce’ but sometimes you have to disclose it to advance your business interests.”

An NDA binds another party to secrecy and establishes the grounds of legal recourse if the agreement is breeched. However, confidentiality agreements can vary widely depending on the trade secrets that are being protected and the parties that are entering into agreement.

Types of Small Business NDAs

1 - Interviewees

While many companies overlook the importance of NDAs for prospective employees, this is one of most crucial areas for businesses to protect themselves. Visitors, especially interviewees, can be privy to discussions related to new technology development, growth strategy plans, and upcoming product or service launches, making them a liability if they are not offered or do not accept the role. Even the interview process can be worth protecting for some companies.

An NDA that accompanies the interview process should be a broader document that covers anything interviewees may see, be told, overhear, or be asked in an interview. The confidentiality agreement should also prohibit photography, video, and audio recordings by interviewees in the office. The goal is to protect business interests among individuals who, unlike existing employees, do not have a stake in the company’s future.

Ideally, the NDA should be completed after the initial phone screening before bringing the candidate into the office for an in-person meeting. This eliminates the element of surprise and provides adequate time for the document to be reviewed.

2 - Employees

Recent news reports have focused on situations where companies and high-powered individuals have used the cloak of an NDA to hide abuse and harassment or buy the silence of affected individuals. However, an employee NDA should never cover up wrongdoing. Silencing disgruntled employees with a legal agreement is an unscrupulous practice that can foster a toxic culture and result in greater brand damage in the long-run.

Instead, requiring employees to sign a confidentiality agreement should aim to protect market interests. An employee NDA should be specific and reasonable – clearly articulating the types of information it protects and setting a justifiable timeframe for confidentiality.

Depending on the size and nature of the company, an NDA may need to be amended for certain roles or teams to provide enough specificity. The confidentiality agreement should avoid being too broad by only including what is necessary to cover vital business interests. NDAs that are too generalized can drive away top talent by portraying the company as paranoid and distrustful.

When the NDA is introduced, employees should always be provided with adequate time to review the agreement alone or with legal counsel. This is especially important when an NDA is rolled out after an employee has already been hired and learned of privileged information. If employees request to modify the agreement, it is best to have them work directly with your business attorney or in-house legal counsel to collaborate in a way that will be beneficial to both parties.

3 - Key Accounts

Top clients and customers should be bound by a confidentiality agreement when they are in a position of piloting new offerings or opportunities. Similarly, if a company plans to solicit feedback about current and future business operations or offerings, an NDA should precede this request.

With key accounts, confidentiality agreements can work in reverse as well. Clients may ask a business to sign an NDA to protect their anonymity. Being omitted from a business’s public portfolio prevents competitors from knowing which companies’ products and service they are using, which may be crucial to their success. Typically included in an NDA of this type is a provision to assign a dedicated representative to manage the client’s needs. Providing a single touchpoint allows for greater confidentiality as well as concierge-level support.

Regardless of the direction of the NDA request, all employees with knowledge of the account partnership will need to be informed and compliant with the agreement.

4 - Business Partnerships

Much like key accounts, partners and lenders may require NDAs to engage in business or provide funding. Confidentiality agreements protect business entities and financiers from having their business interests exposed. In highly competitive industries, this is crucial because it can secure current and future business interests by prohibiting business partners from sharing information with competitors.

NDAs between business partners are typically more complicated and, hence, longer than other confidentiality agreements. They are best reviewed by retained legal counsel to ensure that the agreement is fairly drafted to be beneficial to both parties.

Red Flags

Like any legal document, an NDA contains sophisticated formal language that can be confusing to anyone who is not an attorney. To complicate matters, the circumstances around presenting and signing a confidentiality agreement can influence its effectiveness.

Individuals and businesses being asked to sign an NDA as well as organizations creating a confidentiality agreement should be on the lookout for red flags that may hint to improper motives, a lack of enforceability, and concealed addendums.  

Illegal Activity

An NDA should never be used to hide illegal actions like theft or assault. While businesses sometimes use confidentiality agreements unethically to bury negative customer experiences or employee accusations, they are best suited for protecting proprietary information and trade secrets. An NDA is meant to protect what a business should be doing, instead of what it should not be doing.

Vague Language

Confidentiality agreements must be specific. NDAs that are too vaguely worded may not be enforceable because they are open to interpretation, which leaves gaps in legal protection that can be intentionally exploited or unintentionally violated.

Unreasonable Timeframes

A typical timeframe for a confidentiality agreement is one to five years because after this time most protected information will either be made public or considered obsolete. Companies that use longer timeframes may have a valid reason for doing so, but that consideration should be justifiable.

Non-Compete Agreements

Depending on the nature of the NDA, it may also contain a con-compete agreement. This provision is most common in employer confidentiality agreements. Companies that want to protect their businesses from employees leaving to seek employment with competitors may include a section that enumerates restrictions on working for competing entities.  

Non-compete clauses may also be included in partnership NDAs to prohibit subcontractors from poaching clients from their employer.

These additional agreements do not preclude signing an NDA, but they should be approached with caution to avoid a legal battle and/or financial repercussions later.

Employment Blockers

NDAs that do not include formal non-compete amendments may still hinder future employment. Confidentiality agreements that cover too many aspects of the business may stifle an employee’s ability to communicate about the nature of their previous role in a job application or interview. The result can be difficulty in finding gainful employment after leaving an existing job.

Duress

Requiring someone to sign an NDA immediately upon receiving it or threatening adverse consequences (like termination) if it is not signed is unethical and may constitute duress, nullifying the agreement. Always ensure that a confidentiality agreement is presented professionally – allowing all parties to thoroughly review it and ask questions.
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There are many circumstances that warrant the use of an NDA. Your legal counsel can provide you with the best NDA for your particular circumstances.

The content of this article is for general information purposes only. It is not intended to be accounting, tax, or legal advice. Consult with your attorney for specific recommendations for your circumstances.