3 Nondisclosure Agreement Red Flags to Avoid
In today’s busy world, it can be hard to find time to thoroughly read a nondisclosure agreement (NDA), but it’s essential for protecting your business and trade secrets.
Let’s talk about why you NEED to read these documents, their value to your business, and three red flags to watch for.
What Are Nondisclosure Agreements?
Nondisclosure agreements are contracts that govern the protection of confidential information. They explain why this information is being exchanged, define the information that’s considered confidential, and set up guidelines for its permissible usage.
There are two types of NDAs. With a unilateral NDA, the disclosing party requires the receiving party to keep their information confidential. With a mutual NDA, both parties require the other to protect their proprietary information.
Generally, nondisclosure agreements protect non-public information that’s deemed to be sensitive, proprietary, or protected. That may include copyright, patents, intellectual property laws, profit loss statements, balance sheets, financial information, marketing strategies, trade secrets, proprietary processes, client information, and any other sensitive or valuable information.
Why Don’t We Read NDAs?
Most small businesses see NDAs as a necessary step in contracting. They understand they’re giving or receiving confidential information and have no intention of disclosing it. So they sign without reading.
There’s also a bit of success bias going on. Since they’ve never had a problem with NDAs, they assume there never will be.
But in recent news, we saw the risks associated with NDAs when Twitter accused Elon Musk of violating a nondisclosure agreement by revealing the sample size of the platform's checks on automated users.
As with any contract, NDAs place obligations on your business, and it’s important to know what those obligations are. A quick red flag review will take just minutes and can highlight terms that might raise your risk profile. That makes it easier for you to prioritize issues in your contract negotiations.
The Value of Nondisclosure Agreements
In your day to day, you develop and work with proprietary information — an NDA ensures it’s kept private, even when working with outside parties.
Think of Coca-Cola and Kentucky Fried Chicken. Imagine the chaos that would ensue if their recipes were released to the world. They’d lose their market share and likely never recover.
All businesses are built on a unique method, formula, code, or recipe. They all have financial information or business deals they need to keep private. If anyone were to disclose that information, it could ruin them financially.
An NDA keeps non-public information private, so its owners can maintain control of it.
3 Nondisclosure Agreement Red Flags
What should you pay attention to in your nondisclosure agreements? Let’s review three elements that you need to understand, so they don’t come back to bite you.
Red Flag #1: The purpose of the NDA
NDAs must expressly define the purpose of the disclosures. But if the purpose is too narrow or tightly defined, it could pose a problem.
To avoid loopholes, the scope of an NDA should be stated as simply or broadly as possible. For example:
The parties are exchanging confidential information to explore a mutually beneficial relationship or transaction.
This is broad enough to capture just about any information that will pass between the parties.
Red Flag #2: The duration of confidentiality obligations
An NDA should specify the duration of the parties’ confidentiality obligations. It’s common for confidentiality to extend beyond the life of the agreement. But if the term isn’t expressly stated in the contract, confidentiality requirements expire when the agreement ends.
When reviewing an NDA, pay attention to when your confidentiality obligations end and what it covers. If innovations take place and technology and information changes, the agreement may need to be updated to cover this new information.
Be aware, some information will need to stay confidential longer than a couple of years, depending on the relevance to the company. Like Krispy Kreme’s special donut recipe. Wouldn’t you love to get your hands on that?!
Learn a simple contract management process that makes it easy to keep your contracts up to date.
Red Flag #3: What’s deemed confidential?
When confidential information is disclosed, it should be clearly marked, so there’s no question it falls under the nondisclosure agreement.
Some people include a disclosure in their email signature, when emailing confidential information:
The information provided may contain confidential information.
While that’s a good practice, it’s also wise to mark individual files confidential too. A watermark or “Confidential” message in the header will remind the recipient that the enclosed information isn’t for public consumption.
Avoid Breaking an NDA
Breaking an NDA puts you and your business at risk. Especially when the other party experiences a loss or additional costs from the disclosure of confidential information.
An NDA is, at most, two to three pages. That’s a five- or ten-minute read.
Invest those minutes to understand what's in your NDA. Don't just scan and sign. You don't want to risk legal action because you didn't bother to read a few pages to know what you’re agreeing to.
It is in the best interest of all parties to agree on the information that’s considered trade secrets, so you can guard your business relationship.
Too often, small businesses sign nondisclosure agreements without reading them. But an NDA is more than a stack of boilerplate clauses. To ensure you don’t harm your business relationships and put your business at risk, give NDAs the same priority as other contracts.
Need help reviewing your mutual NDA? Delino is a smart contract review platform that helps you reduce risks and accelerate growth. Join our Beta.
DISCLAIMER: Delino is not a lawyer and makes no warranties that its advice will protect your business from lawsuits or damages. Users rely on contract feedback at their own risk. Please consult your attorney for legal advice.