What Is a Non-Disclosure Agreement? A Complete Guide for Businesses

June 23, 2026

7 min read

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Key Takeaways

Clearly defining confidential information in an NDA can help strengthen its legal protection and reduce future disputes.

A well-drafted NDA can help businesses protect sensitive information and respond more effectively to data breaches.

Including clear exclusions in an NDA helps both parties better understand what information is considered confidential.

Extending NDA obligations to employees and contractors can help improve overall data protection and accountability.

Think your team only handles a few NDAs each month? For many businesses, the volume grows much faster than expected.

Startups and mid-sized companies may process hundreds of agreements regularly, while large enterprises often manage between 20,000 and 40,000 active contracts at the same time.

Non-disclosure agreements are involved in almost every stage of business growth client discussions, vendor negotiations, contractor hiring, partnership talks, and investor meetings.

Let’s explore how businesses can manage NDAs more strategically protecting sensitive contract information while keeping approvals, partnerships, and business operations moving efficiently

What Is a Non-Disclosure Agreement?

A non-disclosure agreement (NDA) is a legal contract that protects confidential information by defining who can access and share it. You may also hear it called a confidentiality agreement, a proprietary information agreement (PIA), or a confidential disclosure agreement (CDA). All these names refer to the same basic idea one or more parties agree not to share specific information with anyone outside the agreement. NDAs are used across nearly every industry from technology and healthcare to finance and entertainment.

How Does a Non-Disclosure Agreement Work?

When two parties sign an NDA, they create a legal obligation. The party receiving confidential information (the “receiving party”) agrees not to share it without written permission from the party that disclosed it (the “disclosing party”). If the receiving party violates this, the disclosing party has the right to pursue legal action.

The contract spells out:

What counts as confidential — trade secrets, financial data, product plans, customer lists, software source code, etc.

Who is bound — the signing parties, and sometimes their employees or contractors

How long the agreement lasts — often one to five years, though some NDAs are indefinite

What is excluded — information already public, independently developed, or legally required to be disclosed

The numbers back up why this matters. According to IBM’s 2024 Cost of a Data Breach Report, the average global cost of a data breach reached $4.88 million a 10% jump from the previous year. For US-based businesses, that figure climbed even higher to $9.36 million per incident. A well-drafted non-disclosure agreement is one of the most practical steps a company can take to reduce that risk.

Purpose of a Non-Disclosure Agreement

A non-disclosure agreement (NDA) helps businesses protect confidential information and creates legal protection if that information is shared without permission. It creates a legal responsibility for the receiving party to keep the information private. NDAs are important because they help businesses:

Define confidential information clearly
An NDA explains what information should stay private and what information can be shared openly. This helps avoid confusion between both parties.

Create legal protection
Once signed, the agreement becomes legally binding. Any unauthorized sharing of protected information may be treated as a breach of contract.

Protect ideas and innovations
NDAs help businesses and inventors discuss new ideas safely during development stages without risking public exposure or loss of intellectual property rights.

Types of NDAs

Protect ideas and innovations
NDAs help businesses and inventors discuss new ideas safely during development stages without risking public exposure or loss of intellectual property rights.

1. Unilateral NDA

Unilateral contracts is the most common type. One party shares information; the other party agrees to keep it private. It is typically used when:

A business shares a product idea with a potential vendor

An employer shares company information with a new employee

A startup pitches to an investor

2. Mutual NDA

Both parties share sensitive information with each other, and both agree to protect it. This is common in joint ventures, mergers and acquisitions, and co-development partnerships where both sides have something to protect.

3. Multilateral NDA

Three or more parties are involved, and at least one is sharing confidential information with the others. A single multilateral non-disclosure contract is more practical than signing separate bilateral agreements with each party especially in large-scale deals.

Key Sections Every NDA Should Include

A good NDA should be clear, simple, and easy to understand. Here are the most important sections every agreement should have:

What information should stay private

This section explains what information is confidential. It can include business plans, pricing details, customer information, product ideas, software, financial data, and other sensitive company information.

Responsibilities of the receiving party

This explains how the shared information should be handled. The receiving party should keep the information secure, limit access, and avoid sharing or using it without permission.

Information that is not confidential

Some information is not protected under the agreement, such as:

Information already available publicly

Information already known before the agreement

Information developed independently

Information required by law to be disclosed

Agreement duration

This section explains how long the agreement stays active and what should happen to confidential information after the agreement ends, such as returning or deleting files.

Actions if the agreement is broken

If confidential information is shared improperly, this section explains the legal steps that can be taken to stop further misuse and recover damages if needed.

Applicable laws

This defines which country or state laws will apply if there is a legal dispute between both parties.

When Should You Use an NDA?

A non-disclosure agreement is useful whenever sensitive business information needs to be shared during a professional relationship. Here are some of the most common situations where businesses use a non-disclosure contract:

1. Hiring employees and contractors

Employees and contractors often get access to internal systems, pricing details, customer information, business processes, and company data. A non-disclosure agreement helps protect this information even after the working relationship ends.

2. Business negotiations and due diligence

During mergers, acquisitions, partnerships, or early business discussions, companies may need to share financial records. A non-disclosure contract helps both parties share information more securely during these discussions.

3. Product or software development

Businesses working with outside developers, agencies, designers, or manufacturers may need to share product specifications, source code, designs, or technical details. Using a non-disclosure agreement helps keep proprietary information protected throughout the project.

4. Investor and funding discussions<

Startups and founders often share business models, financial projections, growth plans, and product roadmaps while speaking with investors. A non-disclosure contract can help protect business ideas during early-stage conversations.

5. Licensing and technology agreements

When businesses license software, technology, or creative assets, confidential details are often shared between both parties. A non-disclosure agreement helps protect intellectual property and the terms of the arrangement.

6. Vendor and supplier relationships

Vendors and suppliers may receive access to operational information, pricing structures, customer data, or internal business processes. A non-disclosure contract helps set clear expectations around vendor contracts and confidentiality.

7. Internal team collaboration

Businesses also use non-disclosure agreements internally when different departments or teams work on confidential projects, product launches, financial planning, or sensitive company initiatives.

Limitations of an NDA

NDAs can help protect confidential information, but they also have limitations.

An NDA cannot stop someone from sharing information. It only creates legal consequences after the information is disclosed.

Enforcing an NDA across different countries can be difficult. Legal systems vary, and each country may define “confidential information” or “trade secrets” differently. An NDA valid in one country may not always be enforceable in another.

Most NDAs have a fixed duration. Once the agreement period ends, the receiving party may be allowed to use or share the information unless separate trade secret laws still apply.

Publicly available information is usually not protected under an NDA. Once information becomes public, the agreement generally no longer applies to it.

How to Draft a Strong NDA?

When drafting a non-disclosure agreement, it is important to consider the specific needs of your business and the type of information being shared. Reviewing a non-disclosure agreement sample can help you understand which clauses and protections are commonly included. The following steps can help you create a clear and effective NDA:

Step 1: Define Confidential Information Clearly
Clearly identify what information should be treated as confidential. This may include business plans, financial data, customer information, product designs, marketing strategies, or internal processes. Defining this clearly helps avoid confusion later.

Step 2: Specify How the Information Can Be Used
Explain how the receiving party is allowed to use the confidential information. The agreement should also mention activities that are not permitted, such as sharing the information with unauthorized parties or using it for personal benefit.

Step 3: Identify Who Can Access the Information
Mention who is allowed to access the confidential information. In many cases, access is limited to employees, consultants, or partners who genuinely need the information for business purposes.

Step 4: Set the Confidentiality Period
Outline how long the confidentiality obligations will remain in effect. Some NDAs apply for a few years, while others continue as long as the information remains confidential.

Step 5: Include Breach Remedies and Restrictions
State the legal remedies or actions that may apply if the agreement is violated. This can include financial damages, injunctions, or other legal protections available under the law.

Step 6: Explain How Information Should Be Returned or Destroyed
The agreement should mention what happens to the confidential information after the business relationship ends. This may include returning documents, deleting files, or destroying sensitive materials.

Step 7: Choose the Correct Type of NDA
Select the appropriate type of NDA based on the situation. A unilateral NDA is used when only one-party shares information, while bilateral or multilateral NDAs are used when multiple parties exchange confidential information.

Step 8: Ensure Compliance With Applicable Laws
Different countries and jurisdictions may have different rules regarding confidentiality agreements. Make sure the NDA follows the laws relevant to the parties involved.

Step 9: Review the Agreement Carefully
Carefully review the NDA before signing. Look for unclear language, overly broad clauses, or missing terms that could create legal or operational issues later.

Step 10: Consult Legal Professionals if Necessary
Before finalizing the agreement, consult your legal department or a qualified legal professional. Contract analysis tools can also help identify weaknesses, missing clauses, or potential compliance risks in the draft.

Common Mistakes to Avoid While NDAs

Creating an NDA is not just about filling out a template and getting signatures. To make an NDA more effective, businesses should avoid the following common mistakes:

Being Too General About Confidential Information
An NDA should clearly explain what information is confidential. Using broad phrases like “all shared information” can create confusion and make the agreement harder to enforce.

Not Including Employees and Contractors
Confidential information is often shared with employees, freelancers, consultants, or contractors during a project. The agreement should clearly state that the receiving party must limit access to only the people who genuinely need the information for work purposes.

Setting a Very Long Confidentiality Period
Some businesses try to keep contractual obligations active forever, even for normal business information. In some cases, this may create legal issues. The duration should be reasonable and suitable for the type of information being protected.

Not Updating the NDA When the Business Relationship Changes
Business relationships can grow over time. A simple partnership may later involve new projects, technologies, or sensitive data. If the NDA is not updated, some newly shared information may not be properly covered under the original agreement.

Forgetting to Mark Information as Confidential
Even when an NDA exists, it is still a good practice to label important documents and files as “Confidential.” This helps avoid confusion about which information is protected under the agreement.

NDA vs. Other Confidentiality Contracts
Terms like NDA, confidentiality agreement, and confidentiality clause are often used interchangeably, which can create confusion. While they all help protect confidential information, there are small differences in how they are used and structured.

Contract Types	What It Does	When to Use It
Non-Disclosure Agreement (NDA)	Protects confidential information shared between parties	Partnerships, hiring, vendor deals, M&A
Non-Compete Agreement	Stops someone from working for competitors	Employment, business sales
Non-Solicitation Agreement	Stops someone from poaching clients or employees	Post-employment, vendor relationships
Confidentiality Agreement (CA)	Another name for an NDA	Same use cases as NDA

NDAs focus specifically on protecting information. Non-compete and non-solicitation agreements restrict future behaviour. Often, all three are bundled into a single employment contract or business agreement.

Why Non-Disclosure Agreements Are Important for Businesses

Every business handles information that should remain private. This can include customer data, pricing details, financial records, business plans, product ideas, internal processes, software code, and other sensitive information. Here are some of the main reasons why non-disclosure agreements are important in business:

Protects confidential business information

It helps businesses prevent sensitive information from being shared with unauthorized people or competitors. This helps companies protect their operations, strategies, and internal data more effectively.

Helps protect intellectual property and ideas

Businesses often share product concepts, software, designs, research, or development plans during projects and partnerships. It helps protect these ideas by keeping them secure, private, and shared only with authorized parties.

Builds trust in business relationships

Confidentiality is important in professional relationships. Signing a contract shows that both parties are committed to handling information responsibly, which helps build trust and improve collaboration.

Supports safer business discussions

Companies share sensitive information during partnerships, vendor discussions, mergers, acquisitions, and investor meetings. It allows these conversations to happen more securely and professionally.

Helps maintain a competitive advantage

Confidential business information can provide a major advantage in the market. By protecting internal strategies, pricing models, processes, and innovations, businesses can reduce the risk of competitors gaining access to valuable information.

Reduces business risk

A non-disclosure agreement creates clear rules around how information should be shared, stored, and used. This helps businesses reduce misunderstandings, prevent misuse of information, and improve accountability.

Creates legal protection

If confidential information is shared improperly, a non-disclosure agreement provides legal support for the affected business to act and protect its interests.

How CLM 365 Helps Manage Agreements Effectively?

CLM 365 works smoothly within the Microsoft environment, allowing businesses to manage contracts using tools they already use every day. It connects MS 365 apps, helping teams handle contracts without switching between multiple platforms.

The platform helps automate contracting processes, monitor important contract dates and obligations, and simplify compliance management through AI-powered workflows. This reduces manual work, improves visibility, and helps teams stay organized.

Designed with both simplicity and security, CLM 365 offers an easy-to-use interface suitable for growing businesses as well as large enterprises. Teams can create, review, track, and manage contracts with greater confidence and control.

The platform also supports GCC and GCC High environments, providing advanced security and data protection features for organizations working

Conclusion

A non-disclosure agreement is one of the most practical legal tools a business can use. It protects trade secrets, proprietary data, and competitive advantages all without requiring litigation upfront. NDAs set the rules early and clearly, so both parties know exactly what is expected.

With AI-powered contract management solutions like CLM 365, businesses can create, organize, review, and manage NDAs more efficiently within their existing Microsoft workflow.

Start your 14-day free trial of CLM 365 today and simplify the way your business manages contracts and confidential agreements.