Non-Disclosure Agreement (NDA): Definition & Free Template

A non-disclosure agreement (NDA), also known as a confidentiality agreement, is a legal document used to safeguard your business’ proprietary information and data. An NDA is used by businesses when sharing this type of information with at least one other person or organization. The document states that the information cannot be disclosed by one or both parties to the agreement. We offer a free NDA template below you can use or customize for your business. If you want to ask legal questions while developing your NDA, consider a professional service like Rocket Lawyer.

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Free Non-Disclosure Agreement Template

Download our free NDA template that you can customize to ensure the confidentiality of your business’ trade secrets or client data.

Download NDA Template

Confidentiality Agreement vs Non-Disclosure Agreement

The terms “confidentiality agreement” and “non-disclosure agreement” are used often in business and law and it is easy to be confused due to intermingling terminology.

Confidentiality and non-disclosure agreements address the same subject matter which, primarily, is the protection of information. Any nuanced differences between the usage of each term are subtle and have more to do with the parties to the agreement or the industry it is being used in than anything mandated by law.

It is OK to think of these references toward these documents as referring to the same resource, related protections and needs for them.

What to Include in a Non-Disclosure Agreement

An NDA ensures that a person or organization who has access to your company’s business does not disclose proprietary information to anyone without your consent. Non-disclosure agreements also specify the terms under which the business shares their information. An NDA clarifies what will happen in case the agreement is broken, who will pay for all the expenses, and penalties for violating the agreement. NDA agreements should be prepared in time to sign with the employee’s new hire or on-boarding paperwork.

The four types of information that an NDA should include, regardless of the length or type of agreement, and the order that they should appear in your NDA are listed below.

1. Effective Date

An NDA must specify the date on which it goes into effect. This is generally the date when the agreement is signed such as the start date of an employee or contractor, but it can be a different date. For instance, let’s say you’re hiring a vendor to help you build out your marketing plan and they will begin work in two weeks. You may want to have the effective date of your NDA dated for two weeks from today.

2. Time Frame

The NDA must also specify the time period for which the agreement will remain effective. This can range from a day to an indefinite period after your worker’s employment is over (including years). The NDA time frame will vary depending on what you are trying to protect. The time frame section is where asking your attorney might be best. They can advise you on pros and cons.

3. Protected Information

The agreement must specify the information that is sought to be protected and the owner of the information. This information is referred to as “confidential information” in the agreement. The description of the confidential information must be specific and detailed. General phrases are best avoided as they are hard to define and even harder to prove in a court of law.

4. Consequences of Breaking the Agreement

The agreement must have a clause that permits the business to get an injunction order from a court of law if it fears that the recipient party is likely to disclose the information. Once the agreement is signed and the party receiving the information breaches the agreement, the party can be sued for damages.

Non-Disclosure Agreement Sections

Your NDA should have some or all of these sections as provided in our free NDA template. You and your business attorney may want to revise each section to fit your business, and may choose to add or delete sections based on case law in your location.

Introduction

In the introduction section of your NDA, describe your business with the company name and the name of the party (individual or business) you are making the agreement with. Also, include the date so that the contract is legally valid as of a specific time frame or start date.

Introduction Example:

This Agreement [“Agreement”] is made as of Date [“Effective Date”] between [“Company”] and [ “Employee / Vendor”], collectively referred to as the “Parties.”

Purpose

State the purpose of the agreement. For instance, if your agreement is with a supplier, you’ll state what information the supplier will have access to such as client purchase information. You’ll customize this section of the NDA template with your own purpose. This is also where you can specify the time frame that the NDA is valid.

If Your Agreement Is With an Employee, Consider the Following Narrative:

[Company] owns, possesses or controls certain proprietary and confidential information of a technical, business or research nature and is willing to supply this information on the terms and conditions set out in this Agreement for the employment of [Employee Name].

Disclosure

This section describes who (such as the business or entity) is providing information to whom (such as an employee or vendor), for example. It describes the rights of the person or business disclosing confidential information.

Standard of Care

This section explains that all reasonable efforts should be taken to protect secret information.

Disclosure Restrictions

This section suggests how information may or may not be shared with third-party outsiders. For example, your website developer may need permission to share passwords with a website hosting company.

Parties With Express Permission to Access

This section lists any others who may be given access to proprietary information. For example, your accountant may have an assistant who needs access to your business financial files and vendor contracts in order to build reports.

Storage Restrictions

This section typically clarifies that copies can’t be made, and that electronic documents need to be secured, not made available to others, and destroyed after use.

Instances of Reduced Obligation

This optional section clarifies that information in the public domain, or information that is already known doesn’t necessarily have to be kept secret.

No Representation

This section confirms that the agreement only applies to the parties listed in the agreement, and doesn’t protect other third-party information.

Damages Acknowledged

This section clarifies that if the agreement is broken, damages will be assessed.

Return and Deletion of Information Upon Request

This section requires information and data to be returned to the business on request.

Severability

This section provides legal words stating that if one part of the contract isn’t valid, the rest of the contract is still good.

Indemnification

This section primarily serves to protect the business by stating that if the agreement is broken by the employee or contractor for instance, it’s not the fault of the business.

Merger Clause / Entire Agreement

This statement reminds both parties that this agreement is the primary document, regardless of other agreements, emails, conversations, etc.

Modification

This section allows both parties the right to change the terms at either parties’ request.

Assignment / Delegation

This section protects the business by saying the other party can’t pass this agreement onto someone else. This comes in handy if, for instance, a contractor sells their business, and wants to give your terms to the new buyer. A sale of the business would require a new NDA to be written.

Enforcement

This section specifies which state’s laws apply. In the case of a legal action, it specifies where an injunction or court case might be filed.

Good Faith

This section assumes all involved with the agreement are acting in good faith, and not trying to take advantage of one another.

Successors in Interest

This clarifies that others may be able to keep the agreement in force. This wouldn’t apply in an employee situation. But for instance if you contracted with a vendor, and the vendor passed their business to their kids, the agreement would still stand.

Execution in Multiple Parts

This section is optional, and used in case the agreement has many parts, or there are copies of the agreement that should be considered just as valid as the original.

Capacity to Contract

This section confirms that the contact is being made by people capable of making a contract; for instance, not a minor, or mentally incapable of signing a contract.

Notice of Terms

This section ensures that both parties have read and agreed to what’s stated in the document.

Construction

The section assumes in the case of a disagreement that both parties had an equal hand in creating the document.

Signatures

Both parties should sign and date the document. The original NDA should be kept on file with the business/employer. A copy should be made and given to the employee, contractor, vendor, or other party.

What Cannot Be Protected by a Non-Disclosure Agreement

Not all kinds of information can be included in an NDA. Things that are exempt from these agreements include but are not limited to:

• Anything that is a matter of public record is not proprietary information and cannot be protected in an NDA.
• Any information that the receiving party has prior knowledge of or gained from different sources cannot be included in an NDA.
• Any information subject to a subpoena may not be protected, even if included in an NDA.
• Any information that is common knowledge in a field, like our example of an HVAC process is not protected information. For example, how one lights a pilot light is the same regardless of the company they work for.

An NDA is not meant to protect a company from doing something illegal either; if your company has unethical or illegitimate business practices, your clients, employees, and vendors have the right to whistle blow to the proper authorities.

Cost to Have a Non-Disclosure Agreement Reviewed

You can get a non-disclosure template for free online, or download the one we’ve provided above as a starter document. But before using it, it’s best to have an attorney review it for the laws in your state. That may cost from $100 to $200 per hour (more if you’re seeking a specialist or doing business in a large city like New York). A legal expert should confirm that the language used in your agreement can stand up as valid.

Have someone review and finalize your NDA in a few ways:

• $100-$200 per hour: Hire an attorney by the hour to review and finalize your NDA.
• $39.95 – $49.95 per month: Use a service like Rocket Lawyer that provides legal advice on its templated documents.

Where to Store Your Non-Disclosure Agreement

For an employee confidentiality type of non-disclosure agreement to be most effective, consider adding it to your employee handbook to delineate your company policy on proprietary information.

This is because the employee handbook explains in plainer language what is expected to be protected by the agreement, serving as training on the agreement. It is also much easier to update the handbook quickly as your business expands (whereas the contract should be written in a way that rarely should need editing).

The employee handbook section elaborating on the importance of confidentiality should include the following elements:

• Labeling proprietary information as “secret and confidential,” like labeling hard drives or customer files as such.
• Limiting employee access to confidential information to a “need to know” basis by having passcode-required applications or files.
• Periodically searching employee lockers, desks, and computer files for unauthorized storage of information.
• Placing notices about the company’s policy near photocopy machines, printers, and fax machines.
• Requiring outside consultants and temporary employees to sign your NDA.

The business must then define in the handbook what constitutes a secret if the confidentiality agreement is to work.

Don’t forget to include an acknowledgment in employment termination notices that reminds employees of their continued obligation to not misuse corporate trade secrets, even after they’ve been released from employment.

If you need a place to store your NDAs and employment documents, consider using an all-in-one HR, benefits, and payroll vendor like Gusto. Gusto provides HR, payroll processing, benefits, and health insurance administration in addition to electronic signatures and online document storage. In addition, if you contact them about their Concierge package, you’ll have access to their legal experts to ensure your NDA is solid.

Try Gusto

Who a Non-Disclosure Agreement Is Right For

For the purpose of this article, we’ll assume an NDA is best for small businesses with trade secrets or customer lists to protect. However, an NDA could also be used by a contractor wanting to protect information or proprietary tools provided to a client.

Here are two kinds of small business users that may need NDAs:

• Business Owner: A business owner may want to protect their confidential business process, master customer list or product recipes
• Independent Contractor: An independent contractor may want to prevent a customer from sharing trade secrets they’ve provided, such as selling skills, or how best to grow award-winning orchids for sale

Whether you supply confidential inputs to a business or hire gig workers to create your price sheets, you won’t want contingent workers and business partners taking, using or selling your trade secrets and customer information.

An NDA Protects Proprietary Information

Proprietary information is the broad term used to encompass various types of information that have some value to the owner. Proprietary information can be information, records, software, and other work products that are developed on behalf of a company or by using the company’s facilities.

It is information that was difficult or costly to develop, or that has an intrinsic value. This value could be diminished or destroyed if the information is disclosed to others or disclosed without appropriate restrictions. The basic criteria for proprietary information are:

• The information is not generally known to the public
• The information gives the business an advantage over other businesses
• Reasonable efforts are made to protect its secrecy

Let’s look at a few examples of why a business needs an NDA:

Example 1:

An accounting manager quits your firm and becomes the finance director at a competitor. In his last role, he helped out in Board of Director meetings and learned about your company’s new products in beta-testing. He could tell the new firm about two of the products in beta-testing that are not public. An NDA would protect your business in this case.

Example 2:

Your HR manager left to start her own firm. She used Indeed to recruit for you, and she’s using Indeed in her own company. Since Indeed is a public product, an NDA wouldn’t prevent her from using the same software at two different firms.

Let’s look at some other common business situations in which an NDA might make sense:

Common Company Situations & NDAs

3 Questions to Ask Yourself to Discover if You Need an NDA

If you aren’t sure whether your business needs an NDA, ask yourself the following yes or no questions:

• Would an employee telling our competitor about our inner business workings hurt our business in a non-repairable way?
• Would our vendor or business partner telling another company in our industry our arrangement with them hurt our business in a non-repairable way?
• Would I want the grounds to fire an employee if I found out they were giving away our sales secrets or posting our restaurant recipes online?

If you answered “yes” to any of these questions, then you need an NDA to protect your business.

Types of Confidentiality Agreements: Unilateral vs Mutual NDAs

There are two types of NDAs: unilateral and mutual. A unilateral NDA is a one-way contract, where a business is protecting its secrets or trade info. It’s the most common when a business is seeking confidentiality from an employee or contractor. A mutual NDA is used when two businesses need to protect each other’s secrets.

For example, vendors/partners often create mutual NDAs. Mutual NDAs protect both parties equally when they work together on common initiatives such as a merger, or have a manufacturer/supplier relationship.

The Unilateral Non-Disclosure Agreement

Unilateral NDAs are more common. In a unilateral NDA, the business discloses the information to another party and the party that receives the information agrees not to disclose the information. This is commonly used with employees or investors of a company.

Example of a Unilateral NDA:

Bill has a company that provides nutritious frozen snacks. He has all his employees sign an NDA so they don’t share or sell the flavor recipe or manufacturing process with competitors.

The Mutual Non-Disclosure Agreement

In a mutual NDA, the parties agree not to share each other’s information. This type of non-disclosure agreement is generally used when two businesses share proprietary information, such as those who are doing business together to launch a product. This is more useful for vendors or clients and other strategic business partners of a business.

Example of a Mutual NDA

A cleaning company and a moving firm have decided to help cross-market to one another’s client base since they both provide services for people moving in and out of their homes. They would likely learn trade secrets from each other while doing business together. The would both sign and date a Mutual NDA.

Benefits of a Non-Disclosure Agreement

In general, an NDA provides you a means to seek damages in case an employee, contractor, vendor, or other party shares or gives away your business trade secrets.

• It’s date-specific: A judge would know the exact dates that an NDA is in effect.
• It’s company and person-specific: A judge would see who is protected from whom.
• It’s in print: There’s no he said/she said. What’s been agreed to is explicit.
• It’s signed: There’s proof that both parties read and understood it.

Drawbacks of a Non-Disclosure Agreement

On the other hand, a small business owner might feel like an NDA is overkill, or fear using one for risk of insulting a business partner. And an NDA, like any legal document, has to be kept up to date.

• Keeping it in force: An NDA falls right in line with your annual taxes in that you need to stay on top of it, and review it, at least annually to make changes or update dates.
• Storing it: You need a good filing system to be able to retrieve the NDA when you need it, such as when you update your contractor’s project deliverables and timelines.
• Enforcing it: An NDA is only good if you’re going to enforce it. You’d have to hire a lawyer to seek damages against a person who violates your NDA.
• Getting it signed: An NDA requires signatures in order to stand up in court.

Alternatives to Using a Non-Disclosure Agreement

NDA language can be added to your employee handbook in lieu of creating a separate document to protect the confidentiality of your business’s proprietary information. Some examples of where using a shorter or different form may make sense are listed below.

Alternatives to using an NDA include adding similar language to these documents instead:

Non-Compete Agreement

If you’re looking to ensure that your employees don’t go work for a competitor or start their own business using your ideas after they leave your company, you may want to use a non-compete agreement instead of or in addition to your NDA. Be aware that non-compete agreements aren’t valid in some states such as California.

Employee Handbook

Rather than using a full-blown NDA, many employers opt to put a few statements in their employee handbook stating for instance that employees are not to share information about the company outside of the company. You can borrow language from our NDA template above to add to your existing employee handbook or create your own using our free employee handbook template.

Employment Contract

Some business owners prefer to write an employment contract to protect their interests when hiring W-2 or 1099 workers. They may wish to include a non-disclosure section within that employment contract.

Operating Agreement

You may want to include NDA language in your operating agreement if you have business partners. That way it’s clear who has rights to what within your business LLC.

The Bottom Line

If your gut tells you that having a non-disclosure (or confidentiality) agreement is important for your business, consult with your attorney. You can use our free template to get you going, but ensure that the template you end up utilizing is right for you. Better to be overly comprehensive than not have key features in your NDA that your business really needs.