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NDA: What It Is, Different Types, Who Needs It and Common Use Cases

Businesses share confidential information every day. A startup may share its business plan with an investor, a company may disclose financial information during an acquisition, or an employer may give employees access to proprietary information. In these situations, protecting confidential information becomes important.

An NDA, or Non-Disclosure Agreement, is a legal agreement designed to establish obligations around confidential information. It can define what information should be kept confidential, who can access it, how the information can be used, and what happens if the agreed obligations are breached.

Understanding how an NDA works can help businesses make more informed decisions when sharing sensitive information.

What Is an NDA?

An NDA is a confidentiality agreement between two or more parties. It establishes rules for handling information that one party considers confidential.

The agreement may cover information such as:

• Business plans
• Financial information
• Customer lists
• Product designs
• Software and source code
• Pricing information
• Marketing strategies
• Intellectual property
• Trade secrets
• Investor information
• Commercial agreements

The exact definition of confidential information depends on the agreement and the circumstances in which it is used.

Why Is an NDA Important?

When confidential information is shared, there is always a possibility that it could be disclosed or used outside its intended purpose.

An NDA establishes contractual obligations that can help clarify how the recipient is expected to handle the information.

It can also help the parties establish expectations before confidential discussions begin.

However, an NDA is not a substitute for good information-security practices. Businesses should also consider access controls, authentication, encryption, secure file sharing, and appropriate internal policies.

Different Types of NDA

Unilateral NDA

A unilateral agreement is used when only one party is expected to disclose confidential information.

For example, a startup may share its financial projections with a potential investor. The startup is the primary disclosing party, while the investor receives the confidential information.

This structure is commonly used when information primarily flows in one direction.

Mutual NDA

A mutual NDA is used when both parties expect to share confidential information with each other.

For example, two companies exploring a strategic partnership may exchange financial, technical, and commercial information.

Both parties agree to protect information received from the other party.

Multilateral NDA

A multilateral agreement involves three or more parties.

This can be useful when multiple organizations participate in the same project, transaction, partnership, or business discussion.

Instead of creating separate confidentiality agreements between every participant, a single agreement may establish obligations among the participating parties, depending on the legal structure.

Who Needs an NDA?

Startups

Startups often share sensitive information with investors, employees, consultants, contractors, partners, and potential acquirers.

An NDA can establish confidentiality expectations when discussing products, technology, financial information, or business strategy.

Investors and Fundraising Teams

During fundraising, founders may share financial statements, business plans, customer information, product roadmaps, and other sensitive materials.

Whether confidentiality agreements are appropriate depends on the investor and the nature of the information being disclosed.

Companies Considering M&A

Mergers and acquisitions frequently involve extensive information sharing.

A potential buyer may need access to financial records, contracts, employee information, intellectual property documentation, and operational data.

Confidentiality arrangements are commonly considered before detailed due diligence begins.

Employers

Companies may use confidentiality agreements with employees who have access to sensitive information.

These agreements can address confidential business information, customer data, product information, and other proprietary material.

The enforceability and appropriate scope of employment-related restrictions can vary by jurisdiction.

Common NDA Clauses

Definition of Confidential Information

The agreement should clearly identify what information is considered confidential.

A broad but unclear definition can create uncertainty, while an overly narrow definition may leave important information outside the agreement.

Permitted Use

The agreement can specify why the recipient is allowed to use the information.

For example, information might only be used to evaluate a potential investment, partnership, or acquisition.

Confidentiality Obligations

This section describes how the recipient is expected to protect the information and who may be allowed to access it.

Exclusions

Confidentiality agreements commonly identify information that is not subject to the confidentiality obligation.

Examples may include information that is already publicly available, independently developed, or lawfully obtained from another source, depending on the agreement.

Duration

The agreement may specify how long confidentiality obligations remain in effect.

Some obligations may last for a defined period, while certain information, such as trade secrets, may require protection for longer periods depending on applicable law.

Return or Destruction of Information

An agreement may require confidential materials to be returned or destroyed when discussions end or when requested.

This can apply to physical documents as well as electronic files.

NDA Use Cases

An NDA can be relevant in many business situations.

For fundraising, it may govern the handling of sensitive information shared during discussions.

For M&A transactions, it can establish confidentiality obligations before due diligence.

For product development, it can protect information shared with contractors or external development teams.

For partnerships, it can establish rules for exchanging commercial and technical information.

For employee relationships, it can address confidential company information accessible through the employee’s role.

NDA and Virtual Data Rooms

A Virtual Data Room can complement confidentiality agreements by providing controlled access to sensitive documents.

Instead of sending confidential files as email attachments, businesses can place documents inside a secure data room and provide access only to authorized users.

For fundraising or M&A transactions, teams can organize financial records, contracts, presentations, intellectual property documents, and other materials in one location.

Platforms such as DeelTrix can also provide features for tracking document activity, managing permissions, and controlling access to shared business documents.

Important Considerations

An NDA should be appropriate for the specific relationship and transaction.

Businesses should consider the parties involved, information being shared, permitted uses, duration, applicable law, and consequences of unauthorized disclosure.

It is also important to remember that an agreement cannot guarantee that confidential information will never be disclosed. Legal protection should be combined with practical security measures.

For important transactions, companies should obtain advice from a qualified legal professional who understands the relevant jurisdiction.

Final Thoughts

An NDA can provide a structured framework for protecting confidential information when businesses, investors, employees, advisors, and partners exchange sensitive material.

The appropriate type depends on whether information is being shared by one party, multiple parties, or all participants.

Whether you are raising capital, negotiating an acquisition, developing a product, hiring employees, or entering a strategic partnership, understanding confidentiality obligations before sharing sensitive information can help establish clearer expectations.

Combining appropriate legal agreements with secure document-sharing practices can provide a more comprehensive approach to protecting confidential business information.