It can be a difficult process to buy or sell an internet business, so it’s critical to have the proper legal documents in place to safeguard each party’s interests.
When buying or selling an online business, one of the most important legal documents you will encounter is a non-disclosure agreement (NDA) (also known as a confidentiality agreement).
This piece of writing clarifies:
- What an NDA is; how it differs from a confidentiality agreement; what constitutes secret information; what terms are commonly found in an NDA; what happens when an NDA is broken; and how an NDA protects buyers and sellers are just a few of the topics covered.
You will know a fair amount about what NDAs are and how they operate by the time you finish reading this article.
What Is An NDA (Or Confidentiality Agreement)?
A confidentiality agreement, sometimes known as an NDA, is a legal instrument that is utilized when two or more parties want to exchange “confidential information.”
An appropriately written nondisclosure agreement (NDA) will:
- safeguard the private information of the person or organization providing it; prohibit the recipient from sharing it with outside parties or using it for purposes other than those specified in the agreement; and specify the legal repercussions for violating the terms of the agreement as well as the remedies that may be available to the aggrieved party.
Although you may find an NDA template online and draft one yourself, there are drawbacks to this method. It is usually advisable to leave the drafting to a qualified attorney who is familiar with NDA preparation and operation.
What Is The Difference Between An NDA And A Confidentiality Agreement?
Confidentiality agreements and NDAs are frequently used synonymously.
Practically speaking, there isn’t much of a distinction between the two—aside from the label.
The goal of both a confidentiality agreement and nondisclosure agreement is to prevent unauthorized use or disclosure of private information communicated between two or more parties.
A contract or agreement can have whatever name or title you choose from a legal perspective, but the content of the document—rather than its appearance or name—is what matters most.
This means that you should make sure the terms in the agreement are enough to safeguard your interests by understanding their legal implications.
With that out of the way, from now on, non-disclosure agreements and confidentiality agreements will be referred to in this article as “NDAs.”
What Is The Difference Between A Unilateral NDA And A Mutual NDA?
An arrangement known as a unilateral nondisclosure agreement (NDA) or “one-way” NDA is used when one party gives private information to another party without the receiving party giving any of their own information.
A unilateral NDA is frequently employed by:
- Vendors over the course of a business sale process while disclosing private information to potential purchasers.
- When selecting new hires for positions requiring access to private data, business owners should keep this in mind.
- Startups seeking to obtain capital from investors or other external lenders.
Conversely, a reciprocal non-disclosure agreement, sometimes known as a “two-way” NDA, is employed when both sides plan to share information with one another.
You could utilize a mutual NDA:
- As a component of a joint venture agreement in which the participants collaborate to pursue a shared business goal.
- In a scenario where a partner or investor would be keen to purchase a minority stake in a business.
Verify that the appropriate kind of NDA is in place and that you are aware of its operation. If not, you can unintentionally sign an NDA that offers you no protection whatsoever while safeguarding the information of the other party.
What Is Confidential Information?
Any information that is shared “in confidence” between two parties and is not already known to the public is considered confidential information.
Typical categories of private information include:
Confidential Business Data:
- Financial records
- Expertise and proprietary techniques
- Confidential formulas or processes
- Intellectual assets
Personal Data:
- Identity and contact particulars
- Financial data like banking or credit card specifics
- Official identifiers such as social security or tax IDs
- Sensitive personal details like health records or biometrics
Startup Intel:
- Insights into a fledgling venture
- Particulars regarding a prototype or Minimum Viable Product (MVP) for a fresh product or innovation
It is crucial to remember that a lot of the information categories mentioned above are furthermore covered by legal protections.
For instance, privacy and data protection regulations, as well as numerous national laws protecting intellectual property rights, typically safeguard the management of personal information.
You are free to define “confidential information” however you see fit when writing an NDA. Just make sure that any definition you choose to use includes every kind of private information you want to keep private.
What Are The Key Terms Of An NDA?
Although every NDA is unique, most of them have a few standard phrases and provisions.
Below is a summary of a few of these important terms.
Definition Of Confidential Information
It’s critical that the term “confidential information” in an NDA be defined correctly.
If you define private material too narrowly, you run the risk of unintentionally leaving out certain information that you would have otherwise intended to be protected by the NDA’s conditions.
On the other hand, vagueness can also result from defining the term too widely or not at all. In the event of a disagreement, a court may rule that the term is too vague to give the parties under the NDA any assurance.
The court will have the discretion to interpret the NDA in these situations, which could lead to an unfavorable conclusion.
It is worthwhile to take some time to consider the kinds of data you want to keep private and make sure your definition includes enough detail to cover these kinds of things. After that, you can include some more general topics to address topics you might not have considered.
Term Of The NDA
The parties can be certain about the length of their responsibilities under the NDA by knowing its term or duration.
NDAs are private agreements, therefore the parties can decide on any duration they like.
A standard NDA “term” does not exist. Rather, the length of the NDA will be determined by the events that led to the requirement for an NDA to be established.
For instance, if you are selling an internet company and prospective purchasers have asked to see copies of your company’s financial records, it is advisable to make sure that during the sale process, this information is kept private from your competitors and the general public.
Normally, an NDA’s confidentiality obligations end when the sale is completed, but you should make sure the NDA is in place for a few years after the buyer leaves so they are barred from sharing your valuable business information if they decide not to move forward with the purchase of your company after receiving copies of it.
Although it is possible, it is not standard practice to have an endless period for a non-disclosure agreement (NDA) because it would be very difficult to monitor and enforce. This is due to the fact that several nations have “statutes of limitations” that set forth deadlines and may prohibit a seller from suing a third party for violating an NDA.
Confidentiality Obligations
In an NDA, it’s crucial to outline each party’s rights and responsibilities clearly.
For the recipient(s) of confidential data, their duties typically involve:
- Using and revealing the confidential info solely for the approved NDA purposes.
- Ensuring the safety and security of the confidential data.
- Sharing the confidential data only with authorized individuals as per the NDA.
- Promptly informing the data owner of any NDA violations.
- Returning or destroying any confidential data in their possession upon the data owner’s request.
Exclusions
Even though an NDA can have a broad definition of “confidential information,” there are frequently some kinds of information that fall outside of this definition and are not subject to the NDA’s secrecy requirements.
Generally speaking, excluded elements will include any information:
- previously in the public domain (which the recipient has not disclosed); already known to the recipient; legally obtained by the recipient or from a third party; specifically designated as non-confidential by the disclosing party; and independently developed by the recipient (without reference to the confidential information received).
Governing Law
Although it is sometimes disregarded, the controlling law under an NDA is a crucial component of the agreement.
The NDA lays forth the conditions under which the parties must use and disclose the secret information, but how these conditions are interpreted will depend on which nation’s laws apply to the particular provisions of the agreement.
The governing law section of the NDA specifies which nation’s laws will apply to the terms of the agreement, and the parties must agree on this.
What Are The Risks Of Not Having An NDA In Place When Buying Or Selling A Business?
It should be clear to you by now that having an NDA in place is essential when buying or selling a business.
You might still be curious about the dangers of not having an NDA in place, though. The following are some of the main dangers connected to not having an NDA in place:
For Sellers:
- Sharing sensitive details with potential buyers during the selling process opens the door to leaks, leaving you vulnerable to exposure among competitors, clients, suppliers, and beyond. Without legal safeguards, there’s little recourse against those who spill the beans. Additionally, if your intellectual property is unveiled before you secure proper protection, competitors might snatch it, risking your business’s future viability and value. While legal action is an option, it’s a costly and time-consuming endeavor.
For Buyers:
- Without a solid Non-Disclosure Agreement (NDA), sellers may hesitate to disclose vital information during negotiations. This lack of transparency complicates your due diligence process, potentially leading to ill-informed investment decisions. Refusal to sign an NDA can also erode trust with the seller, jeopardizing the entire sale. It’s essential to establish trust and facilitate open communication to ensure a smooth transaction.
What Happens If A Party Breaches An NDA And How Is The Affected Party Protected?
When there is a violation of the conditions of the NDA, the dispute resolution procedure should be outlined in detail in the provisions of the NDA.
According to the discloser, if a recipient violates their confidentiality responsibilities, the discloser should be able to seek an injunction. A court ruling known as an injunction stops the receiver from breaking or allowing the recipient to continue breaking its obligations under the NDA. To stop a breach, for instance, the court could mandate that any private information that is in the recipient’s control be destroyed or returned.
An affected party under an NDA may also be entitled to damages in the event of a violation. Typically, monetary compensation is granted as damages, with the amount determined by the aggrieved party’s past and future losses.
Make sure you are aware of your responsibilities before signing an NDA, whether you are giving or receiving personal information. If you don’t, in the event of a breach, you can be responsible for paying the other party’s damages.
Conclusion
When selling an online business, it’s imperative to ensure potential buyers fully grasp their responsibilities regarding the information you provide them. This necessitates a robust Non-Disclosure Agreement (NDA) in place.
While there’s a plethora of free NDA templates available online, it might seem economical to draft your own. However, crafting an effective NDA requires precision in language, making it worthwhile to enlist the expertise of a seasoned lawyer.
Without a meticulously crafted NDA, you risk exposing your valuable data to misuse or public disclosure without legal recourse.
Opting for a full-service broker like CasinosBroker offers the advantage of having experienced legal professionals draft NDAs and other essential documents, freeing you to focus on the exciting journey of entrepreneurship.
Contact our business analysts today to explore how you can buy a lucrative business or achieve a transformative exit by selling your current venture.