In Short
An NDA protects your business’s confidential information, but it is only appropriate in certain situations. Use NDAs when sharing sensitive information with third parties such as potential hires, developers or early-stage investors. In many ongoing relationships, other agreements like employment or shareholders’ agreements provide more suitable protection.
Tips for Businesses
Before requesting an NDA, consider whether you need to disclose confidential information at all. Use NDAs early in discussions with external parties, but rely on employment, contractor, development or shareholders’ agreements for ongoing protection. Avoid requesting NDAs from lawyers or sophisticated investors unless genuinely necessary.
Summary
This guide explains when Australian businesses should and should not use non-disclosure agreements, and the alternatives available. It is prepared by LegalVision’s business lawyers, a commercial law firm that specialises in advising clients on confidentiality and commercial contracts.
A Non-Disclosure Agreement (NDA) is an essential legal document for your business. As you build and grow your business, you will discuss your ideas, competitive advantages and aspirations with many people. An NDA keeps your ideas confidential, but is not always appropriate or necessary. In this article, we explain when you should and should not ask someone to sign an NDA.
What is an NDA?
An NDA (also referred to as a Confidentiality Agreement), is a legal contract that protects your business’ confidential information from becoming public or misused. A well-drafted non-disclosure agreement specifies:
- what information is confidential;
- how the other party must handle it; and
- the consequences for breaching the agreement.
NDAs are commonly drafted to protect:
- business plans, methods and ideas;
- intellectual property;
- trade secrets;
- financial information;
- marketing and capital raising plans; and
- customer and supplier lists.
Co-Founders and Business Partners
Your business partnership depends on mutual trust, but does your business also need an NDA?
As your business co-founders are inherently involved in the business’ development, asking them to sign an NDA is often not necessary. Instead, relying on a shareholders’ agreement, which sets out the rights and obligations of the co-founders, may be more appropriate.
However, there are circumstances where your business may benefit from an NDA . For example, if you have a great and unique idea, but require a technical co-founder, you may need to speak with multiple people to find the right fit. Here, an NDA can protect your idea during early discussions.
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Employees and Contractors
When hiring for your business, you may need to share confidential business information. You should use an NDA when sharing sensitive information with potential employees and contractors during recruitment.
Once you hire an employee or contractor, an Employment or Contractor Agreement should provide ongoing protection for your business. These agreements typically include clauses that protect your business’s:
- intellectual property;
- confidentiality; and
- non-compete or restraint of trade clauses
Developers
Before engaging with developers, consider whether you can outline your project without revealing confidential information. General functionality and technical requirements may be enough for initial discussions.
If your business needs to disclose trade secrets or sensitive technical details during discussions with potential developers, use an NDA to protect the information. You should also explain why the NDA is necessary to protect your intellectual property.
Once you select a developer, a development agreement will provide ongoing confidentiality protection throughout the project.
Lawyers
Lawyers across Australia must comply with strict obligations to protect their clients’ confidentiality. A breach of these rules can have severe consequences for a lawyer, and consequently, an NDA is not necessary.
Customers or Clients
If your business offers products or services that disclose confidential information, you may also need an NDA to protect your intellectual property, ideas and business model.
You can ask a client to sign an NDA before providing goods or services, but this is not very common. Instead, you should provide appropriate terms and conditions that include relevant intellectual property protection and confidentiality clauses.
Investors
When raising capital, your business must carefully consider whether to use an NDA.
If you are conducting an early ‘friends and family’ round and need to disclose confidential information, asking them to sign an NDA may be appropriate. Clearly explain why you are requesting it and consider whether including confidential information in your pitch is necessary.
It is not common to ask sophisticated investors to sign an NDA before your pitch. Sophisticated and professional investors review numerous pitch decks and may already invest in or advise a similar business. The NDA would prevent the investor from using your information to compete with you by entering into business arrangements with your competitors, customers, or employees. Sophisticated investors are rarely in the business of stealing ideas; therefore, it is unlikely that they comply with the terms of the NDA. Requesting an investor to sign an NDA may delay or deter their investment.
If an investor proceeds with an investment, you will typically issue equity and include them as a party to your shareholders agreement. A well-drafted shareholders agreement should contain the relevant intellectual property, confidentiality and non-compete protections. Your lawyer can tailor these protections to suit the type of investor or investment. These clauses should appear in shareholders agreements regardless of whether you used an NDA earlier
What if you have already disclosed information?
You can request the other party to sign an NDA that covers information you already disclosed. If this is not appropriate, other legal means may still apply, including:
- Copyright: Automatic protection of creative works that you have documented in another way.
- Trade marks: A registered trade mark protects your brand by distinguishing your goods and services from others in the market. You can register your business name, logo, app name and slogan with IP Australia.
- Patents: If you have developed new technology or processes, you may consider patent protection.In Australia, standard patents last 20 years. To obtain a patent, you must publicly disclose your invention, and in return, it grants you exclusive rights to commercially exploit it for the duration of the patent term.
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Key Takeaways
An NDA is an important legal tool for protecting your business at every stage of growth. However, you should assess each situation carefully instead of asking everyone you deal with to sign one. Consider whether you need to disclose confidential information, what specific information needs protection, and whether an NDA is the right tool or if other agreements (like employment contracts or shareholder agreements) would be more appropriate.
If you need assistance with drafting an NDA or have any questions about when it’s appropriate to use one, get in touch with our commercial lawyers. LegalVision provides ongoing legal support for businesses through our fixed-fee legal membership. Our experienced startup lawyers help businesses manage contracts, employment law, disputes, intellectual property, and more, with unlimited access to specialist lawyers for a fixed monthly fee. To learn more about LegalVision’s legal membership, call 1300 544 755 or visit our membership page.
Frequently Asked Questions
It depends on your business and the type of information you’re protecting. Most NDAs last between two and five years from when you share the information. If you later sign a more detailed agreement (like an employment contract or services agreement), its confidentiality terms will usually replace the NDA.
If someone discloses or misuses your confidential information in breach of an NDA, you can take legal action. You can ask the court to order them to stop sharing or using the information and to compensate you for any loss you suffered. In some cases, you are able to recover profits they made from using your information. Keep in mind that legal action is expensive and the outcome is never guaranteed.
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