26 Nov 2012
This year, Ohio made important updates to both its corporate and LLC codes. Overall, the changes to the corporate code were well warranted and should be seen as an improvement over the previous iteration of the code. However, the updates to the LLC code, especially in the area of fiduciary duty, may prove to be too broad and might have the effect of causing Ohio businesses to more frequently organize LLCs in alternate jurisdictions such as Delaware. Importantly, these changes apply not only to new entities, but entities that have already been formed in Ohio.
Revisions to the Corporate Code.
The revisions to both the general corporate code and the limited liability code went into effect in Ohio on May 4, 2012. The revisions to the corporate code add flexibility and certainty to the code, making Ohio a slightly more attractive jurisdiction in which to organize a corporation than before.
Board of Directors
First, bringing the Ohio code in line with Delaware, ORC 1705.56 now allows for a board of directors to have only one member no matter how many shareholders there are. Under the previous rule, a one-member board was not allowed if the company had more than one shareholder.
Voluntary Dissolution and Creditors Claims
Next, the corporate code saw changes to the laws pertaining to voluntary dissolution of a corporation. Now, a resolution to dissolve can set out the future dissolution date as well as provide for authorization for the directors or officers to abandon the proposed dissolution before filing the certificate of dissolution. This gives companies greater flexibility when planning for dissolution.
Next, the statute sets out a procedure for notifying creditors and any party holding a potential claim against the company about the impending dissolution and allows the company to set a deadline to make a claim before such claim is statutorily barred. This notice procedure, which is now similar to that used by Delaware, will add some procedural complication to the dissolution process; however, it will give dissolving corporations greater certainty in the dissolution process – which is ultimately good for both the corporation and for legitimate creditors of the corporation.
The corporate code also now provides that indemnification provisions for directors and officers cannot be eliminated after a claim has arisen. This provides certainty for directors and officers serving Ohio corporations.
Revisions to the Limited Liability Company Code.
Overall, the changes to the LLC code are troubling – working to make the LLC both less flexible and less certain than before. It is also important to note that these changes apply to already existing Ohio LLCs, not just to LLCs formed after the effective date of the changes.
Fiduciary Duties of Members and Managers
The LLC Code now clarifies many of the fiduciary duties of members and managers and limits how these duties can be adjusted in the operating agreement. These changes make Ohio LLC law divert pointedly from Delaware law.
First, the duty of loyalty is now defined in 1705.281(B):
(B) A member’s duty of loyalty to the limited liability company and the other members is limited to the following:
(1) To account to the limited liability company and hold as trustee for the limited liability company any property, profit, or benefit derived by the member in the conduct and winding up of the limited liability company’s business or derived from a use by the member of the limited liability company’s property, including the appropriation of a limited liability company opportunity;
(2) To refrain from dealing with the limited liability company in the conduct or winding up of the limited liability company’s business as or on behalf of a party having an interest adverse to the limited liability company;
(3) To refrain from competing with the limited liability company in the conduct of the limited liability company’s business before the dissolution of the limited liability company.
Importantly, unlike in Delaware, these duties of loyalty may no longer be eliminated from the operating agreement. However, these duties may be limited by “identifying specific types or categories of activities that do not violate the duty of loyalty if not manifestly unreasonable, and all of the members of a percentage specified in OA authorize or ratify, after full disclosure of all material facts, a specific act or transaction that otherwise would violate the duty of loyalty.”
This is important for any member of an LLC who also participates in or even plans to participate in a possibly competing company. In the tech and startup community, these “competitive” practices are very common and will now need to be expressly set out and agreed to by the other members. Furthermore, it may prove difficult to adequately set out just what the competitive practices may be since nothing can be eliminated that is “manifestly unreasonable,” a term that is by its nature, not entirely defined. It will be up to a court to decide what is or is not “manifestly unreasonable,” which will lead to uncertainty for owners and potential litigation costs in the event of a dispute.
Delaware, the likely alternative candidate for a company considering LLC formation in Ohio, allows the duty of loyalty to be entirely eliminated, and because of this, some companies may elect to choose Delaware over Ohio for organization.
Next, the statutory duty of care for members under 1705.281(C) is now limited to “refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of the law.” Under 1705.81 this duty cannot be “unreasonably” reduced. Similarly for the duty of good faith and fair dealing, 1705.081(B)(5) states that the duty cannot be eliminated, but the operating agreement may “prescribe in writing the standards by which performance is to be measured or specify types or categories of activities that do not violate the duties in each case if not manifestly unreasonable (emphasis added). Along those same lines, under 1705.081(B)(6) the duty of a manager to act in good faith may not be eliminated from the operating agreement, but it may “prescribe in writing the standards by which performance is to be measured or specify types or categories of activities that do not violate the duties in each case if not manifestly unreasonable.”
Again, Delaware allows for the full elimination of these duties in LLC operating agreements. Entrepreneurs should consider whether the elimination of flexibility and the potential for greater risk for managers or investors merits forming a Delaware rather than Ohio LLC, or possibly even whether it would be prudent to convert an existing Ohio LLC to a Delaware LLC.
While the changes to the corporate code are welcome and work to make Ohio a better jurisdiction in which to incorporate, the changes to the LLC code will likely make business owners less confident in choosing to organize an LLC in Ohio. The new statutes have reduced some of the flexibility associated with LLCs and reduced the certainty of a court’s treatment of the operating agreement.
On Thursday, President Obama signed into law the Jumpstart Our Business Startups Act (JOBS Act). This Act, comprised of several bipartisan-supported bills designed to ease capital-raising for small businesses, will undoubtedly be a major game-changer for capital raising and the business of investing in startups. What follows is an analysis of the most important sections and what these changes will mean for startups.
“Crowd funding” typically connotes a way of financing a project or business, usually through online means of bringing investors and capital-raisers together. Congress in its ever-clever acronymous legislative action gave Title III a short title of “Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012″ — or the CROWDFUND Act.
The CROWDFUND Act allows companies to raise startup capital from a large number of investors each investing just a small amount. Investors are limited in the amounts they can invest: if the investor’s annual earnings or net worth is less than $100,000,they can invest the greater of $2,000 or 5% of their annual income; if their net worth and annual earnings is greater than $100,000, they can invest 10% of annual income or net worth, not to exceed $100,000.
On the issuer’s side, the aggregate amount of stock sold to all investors cannot exceed $1 million per year. The Act also imposes other disclosure requirements on the issuer such as providing investors with certain company information and a stated purpose describing the uses for which the capital raised will be used. Most notably, the Act requires the issuer to sell its stock through an intermediary “broker or funding portal,” who must register with the SEC.
The usefulness of this is still unclear and we’ll have to wait until the final regulations are released (due in 270 days) to really know. There is cause for doubt, though, in the act itself. First, the Act requires a great deal of information to be provided about the company, its issuers, the founders, and the securities being offered. In most cases, to get this right is going to require a lot of time by lawyers and accountants (who, by the way, still bill by the hour). Second, the bill provides a pretty broad cause of action against the issuer, AND its officers and directors, for material misstatements or omissions. Given that most startups fail, the real winners here may be plaintiffs attorneys, who will undoubtedly be reviewing with a fine-tooth comb the offering materials of every failed crowd-funded startup looking for some technical misstatement.
General Solicitations in Regulation D Offerings
Regulation D of The Securities Act of 1933 allows companies to avoid costly SEC registration for certain securities offerings. Before the JOBS Act, companies could only offer Reg D securities to persons with whom they had a pre-existing relationship, what is termed a “private offering”. Now, the Act expands this exemption to allow for general solicitations, whereby companies and their brokers can advertise the offering to the general public, although importantly, only accredited investors can purchase.
Every entrepreneur who has ever tried to raise capital (according to the rules) has experienced the frustration stemming from the inability to tell people about the opportunity. This will indeed make it easier for startups to get the word out. Critics though, worry that this allows brokers too much freedom to aggressively advertise stocks to unsuspecting investors — for example, the elderly. I also worry about the noise investment scheme advertisements will generate and the likelihood that it may actually drown out the voices of entrepreneurs seeking capital.
“IPO On Ramp” and “Emerging Growth Companies”
In what has been dubbed the “IPO on Ramp,” the Act designates a new category of “emerging growth” companies and outlines a streamlined IPO process for those companies. The classification for an “emerging growth company” is simple: businesses earning under $1 billion in gross revenue fall within this category’s scope. This classification allows companies to publicly issue stock while exempting them from burdensome disclosure and governance requirements to which larger public companies are subject. It also exempts these companies from Dodd-Frank rules giving shareholders a non-binding vote on executive compensation. The real winners here are VC’s and angel investors as this will create an opportunity for earlier liquidity events. In theory, this should “trickle down” in the form of more active angels and VC’s and perhaps better valuations for the startups.
Private Company Flexibility and Growth
Title V of the Act raises the threshold level on the number of shareholders before a company must go public from 500 to 2,000, thus encouraging a company’s marginal growth without it facing the prospect of filing costly disclosure documents. The need for this stems largely from startups using equity compensation for their employees. Think Facebook.
Regulation A Offerings
Companies who raise under $5 million through an IPO could file under Regulation A to avoid filing periodic reports to shareholders, which conventional publicly-held companies must do. The JOBS Act raises the $5 million ceiling to $50 million, thus easing one burden in issuing an IPO. Regulation A was originally designed as a simplified way to go public in a small way. It has been used rarely in the last decade, however, as the $5 million limit was seen as too low given the costs of compliance with the still someone onerous rules, both before and after the offering. There hasn’t been much attention to this, but we suspect this could generate a new cottage industry of service providers promoting direct private offerings (DPO’s) as again a viable option to raising capital from the public without going through an investment banker.
Should the startup community be happy that legislation permitting crowd funding has finally passed? The bottom line is that it is too soon to tell what kinds of regulations the SEC or state regulators will impose and how the markets will react to these new freedoms. But it is certainly is going to be an exciting couple years watching this play out.
So, you’ve decided to act on your million dollar idea and formed a company. You’ve got an exciting product, momentum, and your workload is at the point where you need to bring in additional employees to help carry out your vision. What’s that you say? Not enough cashflow to pay employees a competitive salary?
Fear not, savvy entrepreneur! You might consider an equity incentive package.
Equity incentives help cash-strapped startups attract talent without digging deeply into the company’s coffers. Typically, a company reserve 5-20% of its equity as an additional perk to employee compensation. You have a few choices when it comes to equity incentives, a popular form being stock options.
A stock option is an agreement to sell a specified number of shares at a specified future date. Stock options are broken down into two sub-groups: qualified and non-qualified stock options.
Qualified vs. Non-Qualified Options
Qualified options meet certain requirements under section 422 of the federal tax Code, which provide some tax benefits to the employee upon exercising the option.
- If the employee sells the stock, it will count as capital gains, not personal income, and is taxed at a lower rate
- Employers get more simplified bookkeeping — when the option is exercised, employers do not have to withhold federal income tax, Social Security tax, or Medicare payments.
- First, you don’t have to worry about meeting tax requirements for qualified options;
- Second, most employees want the cash from selling stock sooner rather than later (one requirement for qualified options is that the employee hold the stock for either two years after the grant, OR one year after exercising the option, whichever time period is longer)–NQOs avoid this holding requirement.
The takeaway is that non-qualified options may be the better choice in most cases: only a small percentage of employees will realize the tax advantages of qualified stock options, and the costs in tracking required compliance outweigh the minimal benefits gained.
Restricted stock differs from options in that the employee pays nothing for the stock, but the stock is subject to forfeiture if the recipient terminates employment within a specified period of time. Restricted stock is taxed on the vesting date for the stock award, as opposed to options, which are not taxed until the employee chooses to exercise the option.
Stock Appreciation Rights (SARs)
Another less popular equity incentive plan are SARs. In SARs, a contract entitles an employee to receive the appreciation in a specified number of shares of stock over a specified period, typically in cash or stock. The employee counts this payout as ordinary income upon exercising the SAR, and the employer gets a tax deduction on that date.
When offering equity incentives, tax considerations are key in determining which plan is best for the company. If your startup is cash-poor but idea-rich, you’ll need top talent to implement your company goals. Equity incentives are a practical way of attracting and keeping valuable employees.
13 Feb 2012
We’ve updated our compilation of startup incubators in Ohio. One notable addition, specifically for Cleveland-based startups, is Dan Gilbert’s Bizdom U, which launched in May 2011. Our goal is to have this resource be as complete and accurate as possible, so if you have any recommended additions or changes, please let us know.
The chart is embedded below, but you can access it directly by clicking here.
Last year, in conjunction with the Obama Administration’s efforts to spur economic growth and job creation, it announced the launching of the Startup America Partnership, an independent nonprofit NGO whose goal is to help young companies with high growth potential. A year into the project, we looked to see what it offers and the ways in which it will help your company grow.
It’s free and easy to join. The requirement is that you are a for-profit startup with at least two people founded since 2006, or a for-profit rampup or speedup with at least six people founded since 2001. You also must provide your EIN or SSN, basic revenue information, company website, and your company and personal LinkedIn profiles.
What do you get in return? Startup America provides unique member-only offers, such as discounts on HP business products like desktops, notebooks, ink and toner; the opportunity to apply for capital investment from Intel, which pledged $200 million to invest in Startup America companies; or a 50% discount on all campaign fees raised (up to $30 million) on IndieGoGo. It also provides numerous educational opportunities in the form of workshops and seminars from Cisco, Ernst & Young, and Microsoft, among others. Finally, it provides a grassroots forum to support regional startup ecosystems – Ohio is not yet listed.
With over 3700 unique deals for members, and other networking opportunities, it may be worthwhile to check out the full list of offers and determine whether your company will benefit by joining.
26 Jan 2012
Each month the Gillespie Law Group compiles the most recent legislative and regulatory developments that could affect startups, tech companies, and website owners.
“Crowdfunding” Update: As we reported last month, the House approved the Entrepreneur Access to Capital Act, H.R. 2930, known to many as the “crowdfunding” bill. This bill would allow businesses to raise money selling unregistered securities using “crowdfunding,” which is the raising of money through mass aggregation of small investments. Although the bill is strongly supported by the Obama administration, the Senate corollary bill, the Democratizing Access to Capital Act, S.1791.IS, is having a hard time getting out of the Senate because of efforts by the North American Securities Administers Association (NASAA) who has been lobbying heavily against the bill because it would infringe on state regulatory power. Additionally, the bill has been slowed because of two Senate hearings that highlighted the potential for increased fraud under the bill.
The House version of the bill would allow issuers, in any 12-month period, to raise up to $2 million if the issuer provides potential investors with audited financial statements, which is not always cheap. Crowdfunders then must comply with a variety of protective measures including warning investors that certain risks are associated with the issuer and that resales are restricted, as well as by providing the SEC with certain other information. Importantly for crowdfunders wanting to avoid SEC registration, investors who purchase securities under the crowdfunding exemption would not count toward the 500-shareholder threshold for SEC registration in Section 12(g) of the Securities Exchange Act of 1934. The Senate version of the bill does have some significant differences from the House version:
- Securities could only be issued through a “crowdfunding intermediary,” which would exclude raising funds through websites like Facebook and Twitter
- Each investor would be limited to investing only $1,000 in any 12-month period
- While the House bill preempted State registration law, the Senate bill would allow for some State registration requirements
A second Senate bill over this issue is also in the Senate, S.R. 1970, painfully entitled “CROWDFUND,” for “the Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act.” The CROWDFUND bill even more narrowly defines what intermediaries investments can be sold through as “funding portals” and investors are limited to the greater of $500 or a 1-2 percentage of his or her annual income, per company to invest in.
General Solicitation. In addition to the the Access to Capital for Job Creators Act, H.R. 2940, the House bill we reported on last month, the SEC’s Advisory Committee on Small and Emerging Companies had made formal recommendations that the SEC should permit general solicitation and advertising in private offerings under Rule 506 where the securities are only sold to accredited investors.
The Access to Capital of Job Creators Act, which passed in the House, would amend Section 4(2) of the Securities Act of 1933 by exempting from SEC securities regulation “transactions by an issuer not involving any public offering, whether or not such transactions involve general solicitation or general advertising.” Importantly, both this bill and the SEC Advisory Committee’s recommendations would generally go against the long-held goal of the securities exemption rules of prohibiting general solicitation of investors by general and open advertising. Instead, both would actually permit general solicitation or advertising provided that all purchasers of the securities are accredited investors and that the issuer has taken reasonable steps to verify that purchasers of the securities are accredited investors.
Internet Law. SOPA and its detractors became major news in the past month with websites such as Google and Reddit actually removing their services from the web for 24 hours on January 18. Recently SOPA and PIPA, a similar bill in the Senate, have been opposed by President Obama and have seemingly been shelved for the time being, however it is likely that new legislation or changes to these proposed bill are coming. For an in-depth look at SOPA, please read our analysis of the bill: SOPA – Cutting Through the Hype.
This post originally appeared as guest blog post on The Metropreneur Columbus.
There are a million and one things to think about when launching a new business − from employees, partners, suppliers, lenders and investors to just making a product that works and that people want to use. It can be tempting to let many legal issues slide. However, for several reasons, properly identifying and protecting your intellectual property assets should be viewed as a priority from the very beginning.
Protecting your intellectual property preserves the value you create in your company in two main ways.
First, there is value in the brand you are creating and developing, i.e. your name and even your look and feel. Apple’s brand itself is estimated to be worth $153 billion− almost half of its market capitalization. Trademark protection is the primary method by which you will protect your brand. However, not all brands can be protected by trademark. You should not invest time and money in a brand until you know that it qualifies for trademark protection.
Second, you are creating value in the original aspects of your products or services, original content you create for marketing or other purposes, original processes you design that create efficiencies or otherwise give you a competitive advantage, or other aspects of your “secret sauce.” Intellectual property tools, such as copyright, patent and trade secrets, allow you to protect your “secret sauce” from misappropriation by others. It is important to understand when you are creating intellectual property assets in your business and takes the necessary steps to protect them.
Intellectual property tools are not just defensive mechanisms, however. They are also the means by which you identify value so you can “monetize” it, i.e. sell it, license it, or even use it as collateral for a loan.
A useful analogy is the tools used by ranchers (branding irons, fences, etc.) to identify and separate their cattle from both wild cattle and cattle owned by others. If you can’t point to it and prove you own it, lenders, investors, and potential buyers are unlikely to attribute any value to it.
Trademarks, patents, copyrights, and trade secrets are the tools that enable you to point to and prove you own the intellectual property assets you’ve created in your business. A properly maintained intellectual property portfolio can generate much more favorable terms for a bank loan or investment, additional revenue streams via licensing deals, or even a significantly higher price paid for your business should you sell it in the future.
Experienced entrepreneurs know that planning for a new business, right from the beginning, should include careful consideration of how you can create valuable intellectual property assets and the steps you need to take to protect and monetize them.
Prior to entering into negotiations with an angel investor or venture capitalist there are multiple due diligence-related items the VC will want evaluate in order to make the decision whether to invest in your company, and if so, how much they want to invest. Failing to properly plan for these issues can at best slow down the process and at worst completely derail the deal. However, the good news is that with some forethought and preplanning, you can have many these issues squared away from the beginning.
Register Your Company
First, regardless of whatever entity type you have chosen (Delaware C-Corp is the most typical for venture capital investment), you need to make sure that you have properly registered with the formation state and that all of your formation documents are in place and organized in a way that can easily be shared with an investor. These documents should clearly state the ownership, include vesting provisions for the founders, and be structured in a way that will allow for future investment from outside parties without too much procedural difficulty. Additionally, it is important to keep detailed corporate records. The lawyer who helps you with your initial formation can help you understand and plan these details.
When it comes to intellectual property, an investor is going to want assurances that no one outside the company will have any claim to the IP the company claims to own. To do this, somewhere in the company’s formation agreements should be language that assigns all IP to the company and if not, it should explicitly outline what is owned by whom and under what arrangement the Company is using those rights. Additionally, you may want to have started registering any trademarks, copyrights, or patents your company has created.
Similar to IP ownership, you should make sure to have all of your contractual agreements solidified. This includes everything from referral agreements to perhaps the most important, employment agreements. You should be able to identify who is an employee and who is an independent contractor and have the documentation to back it up. Not only will documentation suggest to the investor that you are highly organized and a good investment, but these agreements will ensure no surprises down the line with employees and independent contractors, regardless of whether there is impending investment or not. Employment issues, especially when dealing with intellectual property ownership, can be a particularly difficult problem if not dealt with early.
Having these issues dealt with before engaging with an investor will help to ensure smoother negotiations and possibly more company-friendly terms once V.C. or angel investment becomes a reality. While you may be able to handle some of these issues on your own, your lawyer can help to ensure that some of the trickier issues like vesting provisions and intellectual property assignment are completed properly.
While it might at first seem counter-intuitive, initial ownership in your startup should not be based on entirely on who had the idea or who has contributed the most so for. The nature of startup relationships are unpredictable, and oftentimes founders have different ideas on what is expected of one another. Ownership should, at least in part, be based on future contributions to the Company. The way to accomplish this is to subject at least a portion of the founders’ initial ownership in the startup to vesting requirements. Vesting works to ensure the company can get back some of the equity initially granted to a founder if that founder does not fulfill their expected contributions to the Company.
The Case of the Lost Founder. The worst-case scenario of this is what can be called a “lost founder” – an initial founder who is granted a substantial ownership interest but then disappears because of either disagreement, a change of circumstances, or even a loss of interest. Without vesting provisions, a lost founder will retain their initial ownership, while contributing nothing to the company’s growth. The lost founder can sit and wait for a payday that is unearned, potentially leading to loss of motivation and resentment in the other founders and killing any momentum the startup had. Furthermore, since sophisticated investors will recognize the potential for that loss of motivation, a lost founder often discourages potential investors. A properly structured founders equity arrangement will avoid this outcome.
Why Not Just Grant Equity Later? Founders often suggest that stock just be issued in the future when tasks are completed or after a founder works for the required time. Although perhaps simpler, the problem with this method is that it can have significant tax consequences for the founder since stock granted at a later date is likely to be worth much more at the time of grant than stock granted when the company is formed (let’s hope so). Since they would receive that stock in exchange for working, they’ll have to pay taxes (at ordinary income rates) on the value of it when they receive it; and often neither they nor the company have cash to pay those taxes. To prevent this result, stock (subject to vesting) is issued at the very beginning to the initial founders (and perhaps some of the first employees) and, provided that the correct tax forms are filed (see previous post on 83(b) election), taxes on that stock will be either very small or nothing at all.
Find the Sweet Spot. Since the ultimate goal of vesting arrangement is to properly align the incentives of the founders, great care should be taken to structure these arrangements in a manner that accurately reflects the expectations of the founders. Don’t rely on what your friend says his startup did or what is in some form you found on the internet. The most important question to ask is what is each person supposed to contribute and when is that expected to occur? Is it related to a specific task such as, perhaps, building a particular product? Or is it leadership or expertise provided over time? Has some of it already occurred? You don’t want too much of the equity to vest until the bulk of what is expected of the founder is completed.
To reach that result, founders can specify exactly what portion of the stock is subject to vesting (the more the better) and then specify how and when the vesting will occur, i.e. either time-based vesting, milestone-based vesting or even a combination of both. Time-based vesting means that vesting will occur with the passage of time. Four-year vesting arrangements are common, but time-based arrangements should be based on the structure and plans of the startup, and not just on industry convention. Milestone vesting involves the vesting of ownership shares by articulated events, or milestones. For instance, if one founder will be writing the code for a website, that founder could have 25% of the shares vest upon the launch of the beta version of the site and another 25% upon launch. Milestone vesting works well for founders actively working on particular projects and helps to provide continuous incentive to complete that project.
Put it in Writing. Co-founders armed with a basic understanding of why vesting is important and the various types of vesting arrangements should be able to think through these issues at or near the onset of them working together. Founders shouldn’t attempt to document a vesting arrangement at home as seemingly insignificant drafting variances can have very significant consequences. Having thought through these issues before going to see your lawyer, however, should help keep costs under control.
10 Oct 2011
NDA’s should be tailored to the situation, covering only what needs to be covered, and doing so clearly. The most important issue to consider when drafting an NDA is to make sure that the agreement would be enforceable by a court. The quickest way to unenforceability is to write the terms of the NDA too broadly. When written without reasonable application to the situation at hand, courts will consider the NDA to be more like a non-compete provision and then more likely to consider the agreement unenforceable.
To keep an NDA from being considered “too broad,” the scope of coverage must not be so overreaching that it impedes on the other party’s ability to accomplish its original objective. Conversely, the provision must not be written so vaguely that a court would consider it unenforceable because it does not put the other party on notice of what types of activities are actually barred by the agreement. The types of information usually covered in the scope of the agreement are business strategies, inside studies and analyses, and certain unenumerated materials that have been marked as “confidential” or “proprietary.” In addition to making sure that the confidential information covered is actually confidential, parties must make efforts to keep the information confidential. Simply, if information becomes public knowledge, it can’t be protected by an NDA.
Additionally, an NDA should include reasonable time limitations and should usually allow disclosure in certain limited circumstances, such as with a judicial order. This disclosure term should be supplemented with a procedure on notification to the other party. Often NDAs include a term providing for the return or destruction of information at the end of the relationship and a term providing for injunctive relief in case one party breaches the agreement. Lastly, agreements that require a large entity to comply with an NDA should provide for additional obligations requiring the large entity to have procedures in place to make sure employees are aware of the confidential nature of information covered by the agreement.
Remember. Tailor the NDA to the specific need. Don’t require secrecy on everything (don’t be too broad) and make sure to identify exactly what should be kept secret (don’t be too vague).
For more check out part one of our two-part series on NDAs: Do We Need a Confidentiality Agreement?