When you have a new startup, protecting your intellectual property and sensitive information is a priority. Whether you’re in discussions with potential investors, hiring team members, or working with third-party vendors, nondisclosure agreements (NDAs) are often the first line of defense in safeguarding your business secrets.

As a new business owner, an NDA is a strategic tool to protect your competitive advantage. But not every NDA will fit your needs. Depending on your situation, you might need to tailor the agreement to suit different parties and scenarios. Below, we’ll explain the details of NDAs for startups: when and how to use them, what to include in them, and how to avoid potential pitfalls.

What’s in this article?

• What is an NDA and why does your startup need one?
  
• How to draft an effective NDA for your startup
  
• How to use NDAs in startup fundraising
  
• Should you use a mutual or one-way NDA for your startup?
  
• What happens if an NDA is breached?
  
• How to balance transparency and confidentiality in a startup
  

What is an NDA and why does your startup need one?

An NDA, or nondisclosure agreement, is a legal contract that keeps sensitive information confidential. It’s commonly signed between two or more parties—often businesses, contractors, or potential investors—before important discussions or transactions involving proprietary information take place.

Startups, in particular, need NDAs for multiple reasons.

• Protecting intellectual property: Startups often rely on new ideas, processes, or technology. An NDA helps prevent others from sharing, stealing, or using these innovations without permission.

• Maintaining competitive advantage: When your startup is in its early stages, it’s likely that you will discuss sensitive topics—such as business strategies, funding plans, product development, or customer data—with multiple parties. Having an NDA ensures that the people you talk to about your business can’t disclose or use this information for their own gain.

• Creating trust with partners and investors: Whether you’re hiring employees, collaborating with other businesses, or trying to get investors, an NDA sets the tone for professional respect and trust. It signals that you’re serious about protecting your business and expect the same from others.

How to draft an effective NDA for your startup

Drafting an NDA for your startup requires a careful balance of legal and business considerations. An effective NDA should protect your interests while not overwhelming the other party with unnecessary restrictions. It should be clear, concise, and specific to your startup’s needs. While there are NDA templates available online, consider hiring a legal professional to review your NDA, ensure it covers all necessary points, and complies with local laws.

As a general outline, NDAs should include the following information:

• The names of both parties: The NDA should list the disclosing party (you) and the receiving party (the individual, company, or entity with whom you’re sharing information). Specify legal names to avoid ambiguity.

• The information that qualifies as confidential: The NDA should include the information you want to protect, which can include intellectual property, business plans, customer data, financials, and more.

• The reason the information is being shared: Whether it’s for a potential partnership, investment discussions, product development, or hiring a contractor, you’ll need to specify why the information is being given out to another party. This also makes it clear that the information being shared is limited to a specific use and time frame.

• The ways in which the information must be protected: Specify the responsibilities of the receiving party in protecting the information (e.g., not sharing the information with others, not using the information for personal gain, not misappropriating the information). You can also outline exceptions, such as allowing the receiving party to share it with employees or partners who are also bound by the NDA.

• The length of time the information must be kept confidential: Some agreements last indefinitely, while others might have a set time frame (e.g., one year, three years, etc.). Consider the nature of the information when determining how long confidentiality should last.

• Any exclusions from confidentiality: Your NDA might exclude things such as data already in the public domain, information the receiving party already knew before signing, or information disclosed legally by a third party.

• The consequences for breaching the NDA: Outline any repercussions for not following the NDA, including potential lawsuits or damages that can be claimed. This can act as a deterrent against breaches.

• Which state’s or country’s laws will govern the agreement: You’ll need to specify which region’s laws will be followed—those of the disclosing or receiving party—especially if the receiving party is located in another country. This is important in case legal disputes arise.

• A clause that states how the NDA can be amended: The process of amending an NDA typically requires written consent from both parties and ensures that any changes to the agreement are formally documented and agreed upon.

How to use NDAs in startup fundraising

NDAs can play an important role in raising funds for your startup, but they’re most effective when used thoughtfully and in the right situations. Generally, you should use NDAs after conversations with certain parties have progressed and are serious. Investors, especially venture capitalists (VCs), can be reluctant to sign NDAs early on because they meet with countless startups, and signing confidentiality agreements in every meeting could lead to potential conflicts of interest. At the beginning, potential investors are usually focused on evaluating your company’s vision, its progress, and your staff—not your proprietary information.

Instead of immediately asking an investor to sign an NDA, build trust with them by sharing information thoughtfully. In the initial stages, focus on nonsensitive information, such as your staff, market opportunity, and overall business model. Hold off on disclosing any proprietary details until you’ve vetted the investor and are further along in the process. Also, remember that while NDAs are important tools, most reputable investors don’t want to damage their standing in the startup community by misusing information.

NDAs aren’t usually part of early conversations with investors and other parties, but there are moments when they become important to consider. These include:

• During due diligence: If conversations progress to discussing financial statements, proprietary technology, or customer data, an NDA becomes more relevant. This is because at this stage, both parties are more committed to being in business together.

• With strategic investors: If you’re dealing with a strategic investor—for example, a corporation in your industry—they’re more likely to understand the need for confidentiality. A party having a direct interest in the same niche as your business means that they could benefit from the information you’re sharing.

• With non-VC investors: Angel investors or family offices—private companies that handle investments for wealthy families—might be more amenable to signing NDAs, especially if they’re less established or if discussions move quickly into sensitive topics. These investors are often less focused on having multiple investments and more interested in specific, targeted investments.

Before using an NDA, consult with a legal advisor who can help you craft one that meets your specific needs and doesn’t include unnecessary restrictions for investors. When it comes to fundraising, prioritize the following aspects of an NDA:

• Clarity: Keep it simple. Don’t use broad, vague terms or overly complex legal language that could lead the investor to second guess their involvement or make enforcement tricky. A convoluted or overly strict NDA can create friction in professional relationships, which can hurt your business.

• Scope: Define the information that is considered confidential. Focus on specific pieces of information that need protection—such as intellectual property, proprietary technology, or important financial data.

• Duration: Investors generally prefer NDAs with clear timelines—typically one to two years. Indefinite NDAs can be seen as too restrictive, and they can create unnecessary long-term obligations.

Should you use a mutual or one-way NDA for your startup?

Deciding between a mutual or one-way NDA for your startup depends on your situation and the nature of the information being shared. Generally, you can use a one-way NDA if you’re the party sharing sensitive information and you want to keep the agreement simple and focused on protecting your startup. You can use a mutual NDA when both parties plan to share proprietary information or when you want to build a more collaborative, balanced relationship with a partner or company. Many VCs and investors are unlikely to sign either type of NDA, especially early on—they’re generally not comfortable entering into confidentiality agreements unless discussions progress to a serious point.

Here’s how to figure out which NDA type makes the most sense for your startup.

One-way NDAs

A one-way NDA is the most common type of NDA for startups. It’s used when only one party (typically the startup) is disclosing confidential information and wants the other party (e.g., an investor, potential partner, contractor) to keep it private. These NDAs are more straightforward and protect only what’s important to the startup. You might use a one-way NDA for:

• Investor meetings: When you’re pitching to potential investors and sharing sensitive details about your technology, financials, or plans

• Partnership discussions: If you’re talking to a potential partner and only you are sharing proprietary details about your startup

• Hiring contractors: When you’re bringing in external help—such as freelance developers or marketing consultants—and need to share your internal processes or intellectual property

Mutual NDAs

A mutual NDA is more complex than a one-way NDA. It is used when the startup and another party are expected to share sensitive information and want to ensure that they are both protected. These NDAs support more collaborative, longer-term partnerships in which both parties benefit from confidentiality. You might use mutual NDAs for:

• Partnerships or joint ventures: If you’re in discussions with a potential partner, and both parties are exchanging proprietary information, such as technology, business processes, or customer data

• Mergers and acquisitions: If there are acquisition talks taking place and both parties are sharing sensitive financial information, customer lists, or intellectual property

• Collaborations on product development: If you’re working with another company to co-develop a product or service, and both parties are discussing confidential technology, designs, or strategies

What happens if an NDA is breached?

If an NDA is breached, the consequences depend on the terms outlined in the agreement and the severity of the breach. If the terms of your NDA aren’t followed, keep detailed records of what has occurred, including the information that has been shared and any resulting damages. Consult with a lawyer to evaluate the best course of action. Depending on the nature of the breach and its impact, you might prioritize stopping further harm to your business (through an injunction) or seeking financial compensation (through damages).

Below are some potential outcomes from a breached NDA.

A cease and desist letter

In many cases, the first step to take when an NDA is breached is to send a cease and desist letter. This is a formal notice demanding that the breaching party immediately stop any further disclosure or misuse of the confidential information. It’s often a precursor to legal action and is meant to give the breaching party a chance to correct their actions.

An injunction

If needed, you can request an injunction after an NDA breach. This court order stops the breaching party from continuing to disclose or use the confidential information. Injunctions are useful when the breach is ongoing and immediate action is needed to prevent further damage to your business. A temporary injunction can be granted quickly to stop the breach while the case is being litigated, while a permanent injunction is ordered if the court rules in your favor and requires the breaching party to stop using or sharing the information indefinitely.

Monetary damages

If an NDA breach results in financial loss or harm to your business, you can sue for monetary damages. Compensatory damages cover direct financial harm, such as lost profits or damage to your business’s reputation, while punitive damages are additional fines to punish the breaching party and deter similar behavior.

Specific performance

In some cases, you might seek specific performance, a legal remedy in which the court orders the breaching party to fulfill their obligations under the NDA. While an injunction requires the breaching party to not do something (e.g., share confidential information), specific performance orders them to do something. This is not common in NDA breaches.

Legal costs

If the breached NDA includes a provision for legal fees, the breaching party might be required to cover the costs of litigation. These costs can include attorney fees, court costs, and any other legal expenses related to the breach.

Damage to the other party’s reputation

A breach can seriously damage the breaching party’s reputation, especially in industries such as technology, finance, and healthcare, where trust and confidentiality are particularly important.

Criminal charges

In extreme cases, such as when highly sensitive information is involved, a breach could lead to criminal charges under trade secret or intellectual property laws. This is rare and typically applies only when the breach involves fraud or intentional theft of important business information.

How to balance transparency and confidentiality in a startup

Balancing transparency and confidentiality in a startup can be difficult. You want to build trust and alignment with other parties, but you also need to protect sensitive information. Here are some ways to find this balance.

Know what needs to stay confidential

Not every piece of information needs to be kept secret. Identify what should be protected—such as proprietary technology, financial information, and customer data—and what can be shared more freely. This way, you’re not creating unnecessary barriers for other parties. For example, while your product’s source code should definitely be confidential, general company goals or staff updates can probably be shared openly with your employees.

Build a culture of trust

Creating a transparent environment can boost morale and productivity. You don’t need to share every last detail with your employees, but keeping them informed about high-level goals, successes, and challenges can build trust. Regular staff meetings, in which you share updates without covering sensitive details, such as financials, are a great way to accomplish this.

Use NDAs when it makes sense

Use NDAs to protect your assets when you work with external partners, contractors, or investors. You don’t need to use them for every conversation, but when things get serious and you’re sharing private information, an NDA can help. For example, if you’re hiring a contractor to build part of your product or conversations have progressed significantly with potential investors, protect those discussions with NDAs.

Set boundaries for your staff

Make sure your employees understand what they can discuss freely and what is confidential. Creating and maintaining these boundaries prevents accidental information leaks. Consider including a confidentiality policy in your employee handbook that specifies what’s okay to share and what can only be discussed internally.

Use communication tools thoughtfully

Use communication tools, such as Slack or Notion, to share progress and updates with staff while protecting confidential information. Create separate channels or permission levels so only those who need access to sensitive information have it. For example, you might create restricted channels for discussions about finance or strategy, while keeping other conversations visible to everyone.

Share financial information thoughtfully

Sharing some financial data can help motivate your employees, but you don’t want to overshare. Consider giving high-level updates—for example, the company hitting a big revenue goal—rather than detailing profit margins. This gives staff something to celebrate and keeps them motivated without sharing a full financial report.

Balance transparency and confidentiality with investors

Investors expect a certain level of transparency, but that doesn’t mean you need to show them everything. Start with broader language in initial conversations and wait to talk about financials or sensitive data until later in the process, once you have built trust. As discussions progress and the investor becomes more committed, you can share more detailed information—usually after an NDA is in place.

Lead by example

Set the tone for your employees with your leadership. Give enough information to keep staff engaged and aligned, but without oversharing. For example, if there’s a delay in product development, explain the challenge to employees without revealing every operational problem. Be honest, but don’t overwhelm your employees with unnecessary detail.

Adopt a need-to-know approach

Not everyone on your staff needs access to every piece of information. Share only what’s relevant to each person’s role. For example, your engineers don’t need to know the details of investor negotiations, and your sales team doesn’t need to know the inner workings of product development.