There are numerous legitimate reasons you may have been asked to sign a non-disclosure agreement (NDA) — and usually, there’s no issue with signing one. The most common situations include:
Employee NDA: Employers asking new employees to sign before starting work
Mutual NDA: A company asking potential business partners to sign before exchanging confidential information with each other
Interview NDA: Employers ask interviewees to sign before interviewing
Inventor NDA: An inventor asking potential investors to sign before presenting the invention
But no matter your situation, there are some questions you should ask and answer before signing an NDA.
Key Takeaways
- Define confidential information clearly for the NDA to be enforceable
- Consider the nature of the information and the purpose of the NDA when setting the duration
- Ensure the consequences are unambiguous and reasonable
- Understand every provision clearly and negotiate on terms you feel uncomfortable with
- Why Sign an NDA?
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Questions to Ask Before Signing an NDA
- What type of information are you required to keep confidential?
- What information is considered "confidential"?
- What steps must you take to keep it confidential?
- How long will the NDA last?
- What additional restrictions are in place?
- What are the consequences of breaching the NDA?
- Is there anything on the NDA that you don't feel comfortable with?
- To Sign or Not to Sign
Why Sign an NDA?
NDAs (interchangeable with “confidentiality agreements”) are common in business relationships—over one-third of U.S. employees are bound by them. You’ve likely been asked to sign an NDA because the individual, company, or entity is about to disclose sensitive information, and you’ll be in a position to learn about and leak that information. In all likelihood, you’ll have to sign the NDA to move to the next steps of your situation.
For starters, understand exactly what an NDA is and how NDAs work. Then, answer these seven critical questions to ensure that you’re not putting yourself at more legal liability than necessary and that the deal is fair for both you and the other party.
Do both parties need to sign an NDA?
In the case of a unilateral NDA (or one-way NDA), only the receiving party’s information and signature are required.
Other types of non-disclosure agreements, however, require signatures from both the disclosing party and the receiving party. This is because both parties involved need to acknowledge the legal liabilities they bear in the confidential relationship.
7 Questions to Ask Before Signing an NDA
1. What type of information are you required to keep confidential?
In 2022, our NDA survey with over 5,000 participants revealed that 94% of disclosing parties deemed all information disclosed as “confidential information” in their non-disclosure agreements. Nevertheless, such vague language can create confusion for signees.
While the information you should keep confidential won’t be spelled out in detail, the NDA’s language will list categories of information. For instance, you might be asked to keep customer lists, business plans, trade secrets, or other categories of sensitive information confidential.
Without knowing which information you’re required to remain confidential, you’ll risk accidentally leaking the information. Make sure you clearly understand the scope of confidential information; reconfirm with the disclosing party if you have doubts.
2. What information is considered “confidential”?
Be wary of language in the non-disclosure agreement that doesn’t relate to the information you already know personally or publicly. Otherwise, you’ll handcuff yourself and open yourself up to greater liability — although an NDA with too broad and too vague language is unlikely to hold up in court.
In general, the following types of information should be excluded from non-disclosure agreements:
- Public knowledge – Information that is already in the public domain, like on the Internet (i.e., location of Apple headquarters).
- Prior Knowledge – Information each party already knows before entering the NDA (i.e., the name of a new project the parties will work together for).
- Independent Development – Each party independently develops information.
- Permitted Disclosure – The NDA can permit the receiving party to disclose information to certain third parties, like CPAs or attorneys.
- Compelled Disclosure – If a court order or government agency requires the disclosure of information, then the NDA cannot prevent them from doing so.
3. What steps must you take to keep it confidential?
When you sign an NDA, a confidential relationship is established, which makes you responsible for keeping the information confidential. This means you’re legally liable if confidential information gets leaked (even if it’s inadvertent). Some common practices for protecting confidential and proprietary information include:
- Controlling access to confidential information with passwords, firewalls, and encryption
- Keeping confidential documents in lockable storage cabinets
- Using shredders to destroy secret documents permanently
- Using secure services to deliver confidential documents, if necessary
4. How long will the NDA last?
The NDA should explicitly state when the agreement to protect the confidential information begins (the “Effective Date” ) and the duration in which the information can’t be shared with others (the “Disclosure Period,” or period of confidentiality). In addition, the parties involved usually agree on when the agreement will end (the “Termination” provision).
Our NDA survey in 2022 revealed that more than 80% of NDAs created required the signees to maintain confidentiality indefinitely (forever). This is a legitimate practice for some types of confidential information, like trade secrets (such as KFC’s chicken recipe).
However, not all types of confidential information require such extensive protection. Some information may lose its value over the passing of time. For instance, a company’s financial information from 10 years ago may not be regarded as confidential now, as the information has become less relevant.
Having information protected for a long time can be mentally draining and costly. In addition, you’ll be exposing yourself to more legal liability than necessary if the confidentiality period seems excessively long for the type of information being shared. Find out if any provisions in your NDA are perpetually enforceable (meaning they last forever), and consult with an attorney if you have concerns.
5. What additional restrictions are in place?
Read the NDA carefully (as you would with any legal document) to see if any additional provisions may restrain you from certain actions. Commonly seen provisions include:
- A non-compete clause. If you have access to a company’s proprietary information, the company may include a non-compete clause that limits you from working for a competing business to maintain its competitive advantage.
- A non-solicitation clause. If you receive client information from a company, the company may add a non-solicitation clause in the NDA so that you are prohibited from enticing (“soliciting”) clients for personal gains.
- A non-circumvention clause. If you act as an intermediary for a company in a supply chain, the company may include a non-circumvention clause that prevents you from bypassing it and contacting its end customers directly.
The 2022 NDA survey found that more than 60% of NDAs included non-compete and non-solicit provisions.
The controversy on non-compete clauses
In some states, such as Washington, certain thresholds or conditions must be met to enforce the non-compete clause. Some other states like California deem non-compete clauses entirely unenforceable. In addition, the FTC has proposed a new rule to ban non-compete clauses completely as they “suppress wages, hamper innovation, and block entrepreneurs from starting new businesses.”
6. What are the consequences of breaching the NDA?
Remember that an NDA is a legally enforceable contract, meaning that repercussions can follow in the case of a breach.
Check for any unusually harsh or unfair punishments if you fail to keep the confidential information secret. If the punishment is disproportionate to the breach, hold off on signing. Common consequences for breaking an NDA, other than facing legal action, include:
- Being forced to pay damages for the disclosing party’s monetary loss associated with the breached NDA
- Paying punitive damages because your leak was deemed malicious in court
- Being restrained from certain actions by an injunctive relief
- Losing business opportunities, as the breach can harm your reputation (particularly if the breach involves sensitive or proprietary information)
- Losing the business relationship with the disclosing party
► READ MORE: How to Effectively Handle a Breach of Confidentiality
If you see a liquidated damages provision, be wary. This provision ensures that if you breach the NDA, the company or employer will be entitled to a specific amount of damages—without needing to prove you caused actual damage to them.
However, if the liquidated damages are deemed to be an unenforceable penalty rather than a reasonable estimate of the actual damages that would be incurred in the event of a breach, then the provision may not be enforceable. In that case, the party seeking to recover damages would have to prove the damages suffered due to the breach.
It is important to note that the enforceability of liquidated damages provisions can vary depending on the jurisdiction and the specific language used in the NDA.
7. Is there anything on the NDA that you don’t feel comfortable with?
If you discover (after reading this piece) that there are some red flags in the non-disclosure agreement you’ve been given, ask to modify the document. While you may not win on every point — there may be good reasons for the document’s existing language — it can’t hurt to ask.
What happens if you refuse to sign an NDA?
An NDA serves the purpose of protecting confidential information during the term of a (potential) business relationship. If you refuse to sign an NDA, the other party will likely terminate the relationship you share. For example, an employer has the right to refuse to hire an individual if the individual says no to signing an employee NDA.
To Sign or Not to Sign
Signing a non-disclosure agreement can be a double-edged sword. On the one hand, you demonstrate a willingness to commit and protect the disclosing party’s confidential information, establishing trust in the relationship. On the other hand, you bear a heavy burden and fiduciary duty of maintaining confidentiality. Ultimately, you should only sign an NDA after carefully reading the agreement and weighing the particular circumstances and potential risks.
