What is an NDA?

NDA (definition)

A non-disclosure agreement (NDA) prevents signatories from sharing confidential information with anyone outside the agreement.

An NDA legally protects financial information, intellectual property and data by committing anyone who it signs to keeping the information confidential. An NDA specifies what information, or type(s) of information, is protected by the agreement.

Because NDAs also remove ambiguity around the information covered by the agreement, they give signatories confidence to have open conversations about it.

Examples of when businesses enter into NDAs

One party asks another to sign an NDA

A business may be asked to sign an NDA before receiving sensitive information from a customer or collaborator, or a business may ask another person or organization to sign one before sharing information with them.

For example:

  • a drinks company has to share its recipe with a contract manufacturer, so they’ll first secure an NDA to protect their intellectual property
  • a direct mail business may need to sign an NDA before a charity will share its mailing list of high-profile donors

NDAs in negotiations

Before inking a deal, two businesses may sign an NDA to see each other’s financial information. For example, a manufacturer and distributor may need to understand each other’s financial models to assess the risks and returns of a partnership.

NDAs in operating partnerships

Two organizations may need an NDA to deliver a project together. For instance, a non-profit may partner with a tech company to produce a government-funded app. They would sign an NDA to share data and insights with each other throughout the project.

What it means when businesses sign an NDA

By entering an NDA, signatories agree they won’t share certain information with anyone outside the agreement. There can be legal repercussions for violating an NDA, so it’s important that signatories understand what they’re signing up to.

A business that signs an NDA can generally share the protected information with their lawyer, accountant or other "agent." But the business is typically responsible if an agent leaks the information, so it’s important the NDA makes everyone’s obligations clear.

To ensure compliance with an NDA, businesses need to be extra careful about how and where they record protected information.

And because NDAs need to clearly identify what information is protected, it’s important to work with a qualified lawyer. A poorly written agreement may not be enforceable.

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Disclaimer

This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.