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Nondisclosure Agreements: When Do You Need Them?

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As a small business owner, you need to interact and share sensitive information with many outside people—prospective customers, vendors and collaborators. If this makes you nervous, keep in mind that you can use a non-disclosure agreement to protect your interests.

If this sounds harsh and dramatic, don't think of it that way. In the business world, it actually is quite common and well accepted.

A non-disclosure agreement (NDA) is a legal document that spells out what information being shared is protected from disclosure. It may be something as specific as a trade secret, or as amorphous as a business concept. It might involve the existence of a pending law enforcement investigation. The NDA should outline what specifically should not be shared with others. It should set a time frame and spell out consequences if the agreement is breached.

To those clients who have never signed an NDA or been asked to sign one, the request might be startling. However, it shouldn't be construed as a lack of trust. It is more a formalization of ground rules that protects both parties. U.S. News & World Report, in its Money section, explains:

NDAs boil down to trust. At the outset of a new relationship, the company has no way of knowing whether you would keep this information private, so a legally binding document is often the best way to remedy that. Your employer may have been burned before by a contractor or employee who shared too much; this may explain why he or she keeps secrets from you.

From the client's perspective, it usually makes sense to sign the NDA.

At the start of a new relationship, you want to build trust. You can do that through goodwill. By signing the reviewed document, you show that you have faith in the relationship and the company should too.

From the company's perspective, crafting a specific and clear NDA is crucial. If the matter ends up in litigation, clarity will be the company's best friend. It also is in the company's best interest to not draft an overly broad or restrictive NDA that protects information that doesn't need protecting.

Using non-disclosure agreements don't have to be cumbersome or scary. It should be yet another tool a company uses to protect its legitimate interests.