Non-Disclosure Agreements: Pros and Cons for Small Businesses

As a business owner, it’s important to keep your data and trade secrets protected. Asking your employees to sign a non-disclosure agreement is an effective way to keep your information confidential and secure. Learn more about non-disclosure agreements, reasons why businesses ask employees to sign an NDA and the pros and cons of NDAs.

What is a non-disclosure agreement?

A non-disclosure agreement is a legal contract stating that any information an employee learns about the business remains confidential. Some employers ask all their employees to sign an agreement when they hire them. Others may present the contract only to employees in executive or leadership roles or who have access to highly confidential information like trade secrets or important company data.

Businesses typically use their non-disclosure agreements to protect their intellectual property. Having employees sign a non-disclosure agreement reduces the likelihood of any information being leaked or stolen by competitors or other unauthorized third-parties. Most non-disclosure agreements state the exact information an employee isn’t allowed to repeat to others. If the employee violates the contract, they may face legal repercussions.

Information NDAs commonly protect include:

New and upcoming product designs
Recent and current company inventions
Client and customer information
Trade secrets
Marketing and sales plans
Company passwords and important data

Related: Proprietary Information: What Hiring Managers Need to Know

Reasons businesses want employees to sign NDAs

There are many instances where businesses release important information and need to ensure their employees keep it confidential. Employees may be asked to sign an NDA if they’re:

Working on inventing, designing, implementing or marketing of a new product
Accessing the company’s financial information
Using confidential company information to complete certain tasks in their role
Freelancing or working as a contract employee and may only be working with the company temporarily

Pros and cons of NDAs

Asking employees to sign NDAs helps you feel like your business is protected. Some employees may feel hesitant to sign this agreement. Here are some pros and cons of requiring employees to sign your NDA:

Pros

Some advantages of non-disclosure agreements include:

Keeps competitors from accessing your business’ information: NDAs help prevent your employees from leaving the company and sharing your confidential information with a competitor in exchange for a higher-paying role.
Lowers your chances of losing money due to data leaks: By signing an NDA, your employees are unable to release passwords or company and client data. This helps prevent your business from losing clients and revenue due to data leaks.

Cons

Some disadvantages of NDAs are:

Misunderstandings from employees: Employees may not fully understand the terms to the agreement, causing them to accidentally break the terms without realizing it. This can result in the need for legal processes and paying extensive legal fees.
Time-consuming and expensive contract process: Depending on how much information you need to protect, your NDA may be several pages long. It may be time-consuming to write and costly if you hire a legal professional to write it for you. Employees may decide not to read the entire document, which may lead to accidental contract violations.

Frequently asked questions about NDAs

What's the difference between a confidentiality agreement and a non-disclosure agreement?

Though they’re commonly used interchangeably, some companies use the term “confidentiality agreement” with employees and “non-disclosure agreement” when sharing information with outside parties, like vendors or company partners.

Confidentiality and non-disclosure agreements are typically the same type of contract. They’re both used to protect confidential information from being given to people outside of the company.

How long can an NDA last?

The standard and most common NDA contract length is one to 10 years. The duration of an NDA varies among companies and some employers make theirs last indefinitely to keep employees from ever sharing their information.

Is it illegal to break an NDA?

Most NDAs are considered civil contracts, which usually means breaking one isn’t considered a crime. The punishment an employee receives depends on the terms laid out in your contract and can range anywhere from a lawsuit to termination depending on the amount and importance of the leaked information. Current and former employees who violate certain confidentiality agreements may have to pay liquidated damages, which is a specific cash amount they must pay for each breach. Employees may also have to cover the settlement fees you paid.