NDA stands for Non-Disclosure Agreement (also commonly referred to as a confidentiality agreement). The purpose of an NDA is to protect the confidential information of a company as it engages with another party.
An NDA is a legal agreement that prohibits the party receiving confidential information from sharing that confidential information for a specified period or from using such information other than in connection with the defined purpose of the engagement.
Companies should take extreme care to define what type of information will constitute confidential information under an NDA. An NDA should also specify the time period during which the parties must protect the confidentiality of the information.
NDAs are usually customized to fit the circumstances of the transaction and who will be sharing information. As an example, an NDA entered into in connection with a potential M&A transaction will require different provisions than an NDA entered into in connection with discussions with a potential investor or vendor. In addition, if only one party will be sharing its confidential information then a one-way or unilateral NDA protecting only the disclosing party’s confidential information would be appropriate. By contrast, if both parties to the NDA will be sharing information then a mutual or, in the case of more than two parties, multi-party NDA would be needed in order to ensure all of the shared information is protected.
In general, a company should execute an NDA before sharing any information the company would not want to become public or used, except for the limited purpose for which that information has been disclosed.
Some scenarios in which a company may want to execute an NDA include: presenting the company’s business model before an investor group for potential funding, or contracting with a vendor or contractor to develop, manufacture or distribute some element of a company’s product. Companies are also advised to execute an NDA prior to exploring potential strategic or exit transactions such as an M&A deal, joint venture or partnership.
Typically, companies should obtain legal advice when drafting an NDA to ensure confidential information is adequately protected.