If your company has trade secrets or confidential information, you should fully understand and employ confidentiality and nondisclosure agreements (NDAs). Too often NDAs get a bum rap. Angel investors and venture capitalists won’t sign them. Don’t even ask. They don’t have to, so they won’t. But there are plenty of situations where NDAs will be signed and are absolutely imperative.

One of the most important places to have an NDA is in any discussion regarding the purchase or sale of your business. In any business sale, valuable and secret information will change hands. Customer lists, financial data, marketing and growth plans, prototypes, and other confidential information must be protected before the other side gets a hold of it. If you are buying a business, an NDA is useful because the seller will usually want to see your financials in order to prove that you can make the deal happen. Every time sensitive or confidential information changes hands, there should be an NDA in place.

You should be sure to have an NDA in place any time you hire a consultant or form a strategic partnership. If someone from outside your business is going to see your internal data, plans, and methodology, there should be a confidentiality agreement in place.

(One exception is when you are dealing with your company lawyer. Lawyers are bound by the attorney-client privilege, which is a right that is held by and can only be waived by the client. The privilege will prevent your company’s lawyer from disclosing anything you tell him or her, unless and until you say otherwise.)

When you are putting together an NDA, you will want to think about the following questions. There are no universally correct answers to these questions, because every situation is slightly different.

  • Will both sides provide confidential information, or just one side?
  • Who at each company is allowed to see the confidential information?
  • What is the specific purpose of the disclosure?
  • Should use of the confidential information be limited to that purpose?
  • May “upstream” contractors or consultants see the data being disclosed?
  • Exactly what and what type of information is protected?
  • Does the agreement terminate, or continue in perpetuity?
  • Will the information be returned after the agreement terminates, shredded, or kept on file?
  • Who is responsible, and to what extent, in the case of a data breach at the recipient’s offices?
  • What type of damages will be available for breaching the agreement?

These issues should be worked out and committed to paper before the first piece of information changes hands. With foresight and proper wording, an NDA can help your company open up to growth without compromising its most valuable information resources.