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NDA – How It Works and Do You Need One?
Sharing information is an unavoidable process when launching a new startup or business. An NDA can be used to prevent the unauthorized spread of your sensitive business information — but how do NDAs work, and do you need one for your business?
Some business relationships may necessitate the use of a non-disclosure agreement, or NDA. A non-disclosure agreement is typically used to share sensitive information between two parties without it becoming public.
In some cases, the use of NDAs can be considered overprotective — requesting that other parties sign such an agreement before sharing information is a formal process. However, sharing information without the protection offered by an NDA can be extremely risky.
The innovative nature of startup companies make NDAs a common element of business startups. New startup businesses are often formed around a single idea or concept — sharing this idea can be risky. An NDA can help businesses find the right people to work with while minimizing the risk of sensitive information loss.
What is an NDA for, though, and when will your business need one?
What is an NDA?
An NDA is used to protect any information that may be disclosed by a company. In most cases, NDAs are typically used when negotiating a contract in order to protect confidential information or ideas.
An app developer, for example, may want to consult with a number of different developers in order to create a prototype or MVP of their concept. Sharing the idea behind an app, however, presents a significant risk — if the idea is potentially profitable, there is a risk that these developers may take it for themselves and establish a competing business. An NDA will protect sensitive information in this scenario.
Unlike patents, NDAs can last indefinitely. NDAs are private agreements between parties and don’t require registration with any government body.
What are NDAs Used For?
There are many situations in which a business may need to use an NDA.
A business may choose to use an NDA when consulting or interacting with marketing agencies, PR firms, developers, potential employees or business partners, or designers.
It’s also important to consider an NDA when entering into a business agreement. If your startup or business has created a product or a service and intends to sell it to another business, an NDA may be a critical element of negotiating the deal.
A startup that has created a payment platform, for example, may seek to market it to other businesses, who will integrate it into their existing systems. Both parties may need to share sensitive information about how their systems work in order for the collaboration to proceed smoothly — an NDA protects both parties in this scenario.
Bringing on a new employee often necessitates the sharing of sensitive information. Employees or co-founders need to be aware of plans, financials, products, and business models. Similarly, investors will require sensitive information before investing in a project or business. An NDA can be highly important in all of these scenarios.
What Does an NDA Protect?
NDAs can be extremely flexible. The confidential information protected by an NDA can cover an extremely broad range of definitions, allowing businesses to restrict the dissemination of virtually any information at all.
- NDAs can be used to protect:
- Business models or ideas
- App designs or functionality
- Source code
- Products or services
- Recipes, records, or concepts
- Commercially sensitive data or documentation
An NDA should state the reason why you are sharing sensitive information without including any specific sensitive information itself. The purpose of an NDA should be clearly defined. NDAs should also set a specific time limit for how long the information it covers will remain confidential, as well as the potential consequences of breaching the agreement.
An NDA is a powerful tool that can be used to protect the sensitive information of your startup or business. If you’re not sure where would be best to obtain your NDA, reach out to Fullstack for guidance today.
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Stuart Reynolds is the founder of Fullstack Advisory, an award-winning accounting firm for businesses leading the future. He is a 3rd generation accountant who specialises in tech companies, crypto and entrepreneurs.