Before Signing an NDA: A Guide for Small Businesses

NDAs are designed to protect sensitive information, but their terms can sometimes be overly broad or one-sided. Small businesses, often lacking in-house legal teams, may be especially vulnerable to unfavorable terms. Taking the time to review and understand an NDA before signing is critical to avoid:

• Unintentionally restricting your own business operations
• Exposing your company to legal liabilities
• Giving away valuable intellectual property rights

Spotting red flags in an NDA can save your business from future disputes and legal headaches. Here are some common warning signs to watch for:

• Overly broad definitions: If the agreement defines 'confidential information' too broadly, you may be restricted from using your own knowledge or publicly available information.
• Unreasonable duration: NDAs that last indefinitely can limit your business for years. Look for reasonable timeframes, typically 2-5 years.
• One-sided obligations: Ensure the NDA is mutual if both parties are sharing information. One-way NDAs can put your business at a disadvantage.
• Vague or harsh penalties: Watch for unclear consequences for breaches or excessive financial penalties.
• Jurisdiction clauses: Agreements that require legal disputes to be settled in distant or unfamiliar locations can be costly and inconvenient.

Use this NDA checklist to review any agreement before signing:

1. Confirm the parties involved and their correct legal names.
2. Check the definition of 'confidential information'—is it clear and reasonable?
3. Review the duration of confidentiality obligations.
4. Ensure the NDA specifies permitted disclosures (e.g., to employees or advisors).
5. Look for mutuality—are both parties equally protected?
6. Understand the process for returning or destroying confidential information.
7. Identify the governing law and jurisdiction for disputes.
8. Watch for any non-compete or non-solicitation clauses hidden in the NDA.

Before signing an NDA, consider these steps to further protect your business:

• Consult with a legal professional—even a brief review can highlight major issues.
• Negotiate terms that seem unfair or unclear. Most parties are open to reasonable changes.
• Use contract risk scanning tools like Flag Red to quickly identify hidden risks and red flags in NDAs.
• Keep a signed copy of every NDA for your records and reference.

Many small businesses make avoidable mistakes with NDAs, such as:

• Signing without reading or understanding the terms
• Assuming all NDAs are standard and non-negotiable
• Failing to limit the scope or duration of confidentiality
• Not clarifying what information is already public or excluded

Avoid these pitfalls by following the checklist and seeking expert advice when needed.