What is an NDA?
A non-disclosure agreement (NDA) keeps confidential information private. Learn the types, key elements, and limits.
February 2024 | Published by Xero
Published Thursday 23 July 2026
Table of contents
Key takeaways
- An NDA is a legal agreement that stops the people who sign it from sharing confidential information with anyone outside the agreement.
- NDAs can be unilateral (one-way), mutual (two-way), or multilateral, depending on how many parties are involved.
- Signing an NDA creates real obligations, and breaking one can lead to legal action, monetary damages, and legal costs.
- An NDA can't be used to silence someone reporting illegal activity or making a protected disclosure.
What is an NDA?
A non-disclosure agreement (NDA) prevents signatories from sharing confidential information with anyone outside the agreement. It's also called a confidentiality agreement.
An NDA legally protects financial information, intellectual property, and data by committing anyone who signs it to keeping that information confidential. The agreement specifies what information, or type of information, is covered.
Because an NDA removes ambiguity around the information it covers, it gives signatories the confidence to have open conversations about it.
Types of NDAs
NDAs come in a few forms, depending on how many parties need to keep information confidential. Here's how the three main types work.
- Unilateral (one-way) NDA: one party shares confidential information, and the other party agrees to protect it
- Mutual (bilateral) NDA: both parties share confidential information, and both agree to protect what they receive
- Multilateral NDA: three or more parties are involved, and a single agreement covers the information shared between all of them
Key elements of an NDA
Most NDAs cover the same core points so everyone knows what's protected and what happens if the agreement is broken. A well-drafted NDA usually sets out the following elements.
- Parties: who is bound by the agreement
- Definition of confidential information: exactly what the agreement protects
- Obligations: how each party must handle the protected information
- Exclusions: information the agreement doesn't cover
- Duration or term: how long the obligations last
- Remedies: what happens if someone breaks the agreement
- Return or destruction of information: what to do with the information once the agreement ends
Examples of when businesses enter into NDAs
Small businesses sign NDAs in all sorts of everyday situations. Here are three common ones.
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 it first secures an NDA to protect its 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 so they can see each other's financial information. A manufacturer and distributor, for example, 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. A non-profit might partner with a tech company to produce a government-funded app, and they'd sign an NDA to share data and insights with each other throughout the project.
What it means to sign an NDA
By entering an NDA, signatories agree they won't share certain information with anyone outside the agreement. It's worth understanding exactly what you're signing up to before you put your name to it.
A business that signs an NDA can generally share the protected information with its lawyer, accountant, or other agent. But the business is typically responsible if an agent leaks the information, so the NDA should make everyone's obligations clear.
To stay compliant, be careful about how and where you record protected information. Breaching an NDA can lead to legal action, such as an injunction to stop further disclosure, along with monetary damages and legal costs.
Because an NDA needs to clearly identify what's protected, it's a good idea to work with a qualified lawyer. A poorly written agreement may not be enforceable.
What an NDA cannot protect
An NDA doesn't cover everything. Most agreements exclude certain information, and some limits are set by law.
An NDA generally can't protect information that's already public, information the recipient already knew, or information the recipient developed independently.
There are also legal limits. An NDA can't be used to silence someone from reporting illegal activity or making a protected disclosure, such as whistleblowing. As the Canadian Bar Association notes, an NDA shouldn't stop a person from reporting wrongdoing to the authorities.
How long does an NDA last?
The length of an NDA depends on what it's protecting and what the parties agree to. Terms vary widely from one agreement to the next.
Many NDAs run for a set period, commonly one to several years. Some last indefinitely, such as those protecting trade secrets, while others end once the information is no longer confidential. The term should be clearly stated in the agreement so everyone knows how long their obligations apply.
Keep your business information organized with Xero
NDAs help you protect sensitive information, but keeping that information organized and secure matters just as much. When your financial records live in one place, it's easier to know what's confidential and control who can see it.
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FAQs on NDAs
Here are answers to some frequently asked questions about NDAs to help you understand how they work.
What is the difference between an NDA and a confidentiality agreement?
There's no difference. NDA and confidentiality agreement are interchangeable terms for the same kind of agreement.
How long does an NDA last?
It depends on the agreement, but many run for one to several years. Some last indefinitely, and others end once the information is no longer confidential.
What happens if you breach an NDA?
Breaking an NDA can lead to legal action, including an injunction to stop further disclosure. You may also have to pay monetary damages and legal costs.
Do you have to sign an NDA?
No, signing an NDA is your choice, and you can negotiate the terms or decline. Weigh the opportunity against the obligations, and consider getting advice from a qualified lawyer.
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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.