What is an NDA? Definition and FAQs

Published on Friday 29 August 2025

Table of contents

• What is an NDA?
• Why use an NDA?
• When does your need business need an NDA?
• Types of NDAs
• What it means when you sign an NDA
• Manage your business legal requirements with confidence using Xero
• FAQs on NDAs

Key takeaways

• A non-disclosure agreement (NDA) is a legal contract that protects sensitive information shared between parties.
• You can use NDAs to safeguard trade secrets, financial data, and intellectual property during negotiations or collaborations.
• Non-disclosure agreements can be unilateral (one-way), mutual, or involve multiple parties, depending on who is sharing confidential information.
• If you break an NDA, you may face legal consequences, so always review the terms before signing.

What is an NDA?

A non-disclosure agreement (NDA) is a legal contract that prevents people from sharing confidential business information with unauthorized parties.

NDAs protect your business by:

• Protecting your information: Make a legally binding commitment to keep information confidential
• Setting clear boundaries: Specify exactly what information is protected
• Enabling open communication: Remove uncertainty so you can discuss sensitive topics safely

Why use an NDA?

Using an NDA protects your business’s valuable information. It sets clear, legally binding rules about what you can and can’t share.

An NDA helps you:

• Protect trade secrets, client lists, and financial data
• Preserve your rights to inventions before you file a patent
• Set clear expectations with employees, contractors, and partners
• Take legal action if someone leaks confidential information

When does your business need an NDA?

Businesses often need NDAs when sensitive information is shared in different contexts. The type of NDA you use depends on the situation.

One party asks another to sign an NDA

A one-way nondisclosure agreement (NDA) is most common when only one side is disclosing confidential information. This type of NDA helps protect sensitive business details from being misused or shared without consent.

Common scenarios include:

• Sharing trade secrets – e.g. a drinks company providing its recipe to a contract manufacturer.
• Giving access to client lists – e.g. a direct mail company signing an NDA to receive a charity’s donor mailing list.

NDAs in negotiations

When two businesses are considering a partnership or deal, a mutual NDA ensures that both sides can share sensitive data without risk. These NDAs are especially useful when parties must open their books or reveal internal processes to evaluate opportunities.

Example:

• Sharing financial models – a manufacturer and distributor can safely exchange projections to assess risks and returns before finalizing an agreement.

NDAs in operating partnerships

Once a collaboration begins, NDAs often continue to play a role in protecting intellectual property, customer data, and strategic plans. Ongoing NDAs make sure confidential information remains protected throughout the partnership.

Example:

• Ongoing data sharing – a nonprofit and a tech company developing a government-funded app need continued access to each other’s data and insights.

Types of NDAs

NDAs aren’t one-size-fits-all. The type you choose depends on how many parties are sharing sensitive information and the nature of your business relationship.

• Unilateral (one-way) NDA – Use this when only one party discloses confidential information. Common examples include pitching a business idea to an investor or hiring a contractor for a project that requires secrecy.
• Bilateral (mutual) NDA – This is best when both parties share sensitive information, such as in a joint venture, merger talks, or long-term business partnership.
• Multilateral NDA – Choose this when three or more parties are involved and at least one needs to share confidential information. Instead of drafting multiple NDAs, all parties sign one agreement that covers everyone.

What it means when you sign an NDA

Signing an NDA means you’re legally committing to keep specific information confidential.

Here are the main obligations you take on:

• Keep information private – Don’t share protected details with anyone who isn’t authorized.
• Manage records carefully – Control how and where confidential information is stored or noted.
• Ensure third-party compliance – Make sure your lawyer, accountant, or other agents also respect the NDA.

In addition to obligations, there are also legal consequences to keep in mind:

• Draft NDAs correctly – Write agreements properly so they carry legal weight.
• Understand the risks – Violating an NDA can result in lawsuits and financial damages.
• Seek professional support – Work with a qualified lawyer to make sure your NDA is enforceable.

Manage your business legal requirements with confidence using Xero

NDAs help you protect your business. While they provide legal security, you also need to manage the financial side of your partnerships and projects. With Xero, you can see your finances clearly and make smart decisions with confidence.

Try Xero for free to see how easy it is to stay in control.

FAQs on NDAs

Here are answers to some common questions about non-disclosure agreements.

What happens if you break an NDA?

If you break an NDA, the other party can take legal action. You might have to pay financial penalties, stop sharing the information, or cover other damages.

Are NDAs legally binding?

Yes, NDAs are legally binding if they are written clearly and meet contract requirements. They must be reasonable in scope, duration, and location.

How long does an NDA last?

NDAs can last for a set time, such as one to five years, or sometimes indefinitely if they protect a trade secret. Make sure you agree on how long the NDA will last.