What Should Be in a Non-Disclosure Agreement?
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?
IT Martini looking for startups to present
If you haven’t heard, IT Martini is a well-attended recurring event offering those in the information technology field an opportunity to relax and meet each other. They also feature startup companies, and provide them with space and time to demo their product. It’s good for the community, so I’m sharing the info here:
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IT Martini is coming back to Columbus! In partnership with Janova, IT Martini is kicking things off at the Tween Brands Campus in New Albany on Thursday September 1st. The theme of IT Martini Hour 19 is: QA or the Highway!
One of the most anticipated parts of the IT Martini event is the early stage ‘start-up’ companies that demo their products, founded by local entrepreneurs and IT professionals. IT Martini has given out fifteen (16) IT Community Choice Awards to a field of over one hundred (100) DEMOs.
The highlights:
· Free exposure – There will only be 7-8 early stage companies that can participate at this event. They will be able to receive exposure as the event is marketed, at the event through a social one-on-one demos with attendees, and ongoing through articles, press releases, etc
· Opportunity to connect and showcase what they do – The demos are not conducted in front of the whole crowd, requires no PowerPoint slides, and are social in nature. Each company will be provided their own space to setup and interact with attendees from the Columbus IT community on a one-on-one basis. Depending on the stage of the company this is a great opportunity to make new connections, find potential prospects, try new pitches on attendees, and more!
· Possible award recognition – The attendees will vote for their favorite startup while at the event and the winner will receive the IT Community Choice Award and the opportunity to attend another event in Cleveland OR the ability to go to another city and gain exposure there!! (currently Columbus, Cincy, Indianapolis, Cleveland)
What we are looking for:
· Innovative tech startups that want exposure
· Startups in all phases – We like to include those that are at alpha stage all the way through to companies about ready to exit. This covers both bootstrapped and funded companies alike!
How to learn more:
· Apply to be a demo – All startups that are interested in learning more can register at: http://itmartini.wufoo.com/forms/demo-participant-registration-form/ Once a registration is submitted I will schedule a short call to learn about them, introduce IT Martini, what to expect, and how to leverage this free opportunity
· Contact Kevin Hiser, Entrepreneurship Director, directly – Anyone that would rather reach out to Kevin directly can do so at Kevin@itmartini.com or 614-446-1548
Registering your Software Copyrights: Legal Insurance for your Software.
Guest Post: Thanks to copyright attorney David Valentine-Elam for preparing the informative piece below:
Copyright registration in the United States is optional and protection exists whether you register your copyright or not. So why do I frequently advise my clients to register their code with the Copyright Office? Because there is a big difference between having that protection in the abstract, and being able to take advantage of it in the real world. The cost for registering your copyright is minimal (especially compared to the cost of filing a patent) and the benefits you receive are invaluable:
Enforce your rights.
Until you actually register the copyright you cannot enforce your rights in court. This means that if someone is using or distributing your code without your permission you have no credible threat of filing suit until you have registered. And the most significant benefits are only available if you registered before the infringement began, such as the right to…
Recover statutory damages.
If you register before the infringement, or within 90 days of publishing your code, you can elect to recover statutory damages ranging from $750 to $30,000 (or up to $150,000 for willful infringement) instead of actual damages. This is significant because the actual monetary damages are often minimal or difficult to prove. Opting for statutory damages can also save you significant time and money trying to prove actual damages in court. Of course, if you registered before the infringement, spending money on enforcement may not be too painful when…
The infringer pays your legal fees.
This is the legal insurance I was talking about. In a successful copyright infringement lawsuit, the infringer not only pays the damages, but may also be required to pay your attorney’s fees and court costs. Keep in mind that a copyright infringement lawsuit is federal litigation and frequently the biggest hurdle to enforcing your rights are the legal costs involved, but if you take the time to register your code early…
It may be the last dime you have to spend to protect your software.
When a potential infringer is faced with a legitimate threat of paying statutory damages of up to $150,000 plus attorney’s fees and court costs, they are much less likely to infringe and much more likely to seek a reasonable settlement for any past infringement. Which means you can spend more time running your business and less time in court enforcing your rights.
There are a variety of practical and legal considerations in filing a proper software copyright registration, particularly if your code contains trade secrets you wish to preserve. An experienced copyright attorney can help you secure an enforceable copyright, protect your proprietary information, and answer any questions you have about the process.
David Valentine-Elam
David@ArtandTechLaw.com
The Valentine-Elam Law Firm is a boutique firm practicing Intellectual Property and Technology law and focusing on the representation of artists, businesses, and creative professionals. Find us at www.ArtandTechLaw.com
How to Avoid Tax Penalties on Startup Employee Compensation
Startup and growing companies often use deferred compensation as an effective way to attract and retain important employees. Unfortunately, this process has been complicated by a recent tax change that significantly penalizes a broad range of “non-qualified” deferred compensation plans. Under Section 409A, deferred compensation which does not meet certain requirements is immediately taxable to the recipient and is subject to significant penalties. In order to avoid the penalties associated with this provision, startup companies should ensure that any deferred compensation meets IRS requirements.
Although Section 409A applies to many types of deferred compensation, stock option compensation is the most commonly implicated. Deferred stock option compensation is not subject to Section 409A penalties if the strike price (or exercise price) is greater than, or equal to, the fair market value of the shares on the grant date. Failure to set an appropriate strike price will subject the stock option recipient (employee) to the penalty provisions of 409A. The penalty provisions provide that the recipient of non-compliant stock options will: (1) be taxed at ordinary income tax rates for the value of the deferred compensation, (2) pay an additional twenty percent penalty, and (3) be subject to significant late payment penalties. Employees will, understandably, not be very happy about paying all of these extra taxes. Furthermore, the company may be subject to employee lawsuits for failing to set an appropriate option price.
Since the consequences of setting the strike price below fair market value are severe, you may be wondering how fair market value is calculated for your company’s stock. The IRS has provided several methods for complying with the strict requirements of Section 409A. Although compliance can be achieved through other means, there are three valuation methods that, if followed, create a presumption that the calculated fair market value is reasonable.
Independent Appraisal Presumption
The requirements under the Independent Appraisal Presumption are fairly straightforward. To fall within this presumption, the company must hire a qualified independent appraiser to value the company’s shares. The valuation provided by the independent appraiser is valid for a period of 12 months unless a subsequent event occurs which has a material effect on the company’s stock value. Examples of significant events might include a proposed merger or new equity financing. One downside to this method is the potential cost of hiring an independent appraiser. The upside is that an independent appraisal serves as an insurance policy against a subsequent IRS challenge. When selecting an independent appraiser it is important to ascertain that they are “qualified”. The surest way to do that is to select a professional that has certification credentials from one or more of the four national organizations that provide education and certification credentials for business valuation professionals. They are the National Association of Certified Valuation Analysts (NACVA), the American Institute of Certified Public Accountants (AICPA), the Institute of Business Appraisers (IBI) and the American Association of Appraisers (ASA). Selecting a professional that specializes in 409A valuations is also a good idea and may help keep fees to a minimum.
Formula Valuation Presumption
The Formula Valuation Presumption is only applicable for a narrow range of companies. To use this presumption, the company must already have in place a binding formula for determining the sale price of stock to other parties. For example, if a company’s stock had a permanent limitation which required the holder to sell or offer the stock according to a specific formula (e.g. a buy-sell agreement between the shareholders), that formula could be used to create a presumption of fair market value. These formulas are often based on a multiple of book value or earnings (or a combination of the two). However, if the shares may be sold or transferred in any way other than according to the formula, then this presumption is not available.
Illiquid Startup Presumption
Since startup companies are often difficult to value, the IRS has provided a special presumption for the stock of these illiquid companies. As long as certain requirements are met, the IRS will consider a valuation of startup company stock to be reasonable. However, if the company has any public stock or has been in business for more than 10 years, this presumption is not available. Furthermore, the valuation must be performed by a person with significant experience performing similar valuations and must be evidenced by a written report. But, unlike the Independent Appraisal method, the startup company does not need to hire a third party to perform the valuation (the startup may use in-house personnel as long as the relevant requirements are met). Since in-house personnel may conduct the valuation as long as they are qualified, this method is often cheaper than hiring an independent appraiser. For a full understanding of the requirements pertaining to this presumption, you should consult an attorney.
Deferred compensation in the form of stock option grants can be a powerful and effective tool for motivating and retaining startup employees. However, you must ensure that the strike price is set at, or above, fair market value to avoid significant penalties under Section 409A. By using one of the three presumptive methods for calculating fair market value, you place the burden on the IRS to prove that your valuation is unreasonable. Conversely, if you do not follow one of the above methods, you bear the burden of proving to the IRS that your valuation is reasonable.
An attorney experienced in this area can help you determining the best approach for your company by advising you of the myriad of practical and legal considerations as well as the associated costs and the risks.
Sources of Startup Capital in Ohio: UPDATED
I’ve updated our compilation of sources of capital available to startup companies in Ohio. The list includes angel groups, venture capital funds, innovation funds and some incubators offering financing alternatives. 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 me know.
The chart is embedded below, but you can access it directly by clicking here.
Ohio Early Stage Summit
On September 27th and 28th, entrepreneurs, venture capitalists, angel investors and state economic development officials will gather in Columbus, Ohio to hear presentations from startup companies and learn about recent developments within Ohio’s entrepreneurial ecosystem. The event is presented by the Ohio Capital Fund and the Ohio Department of Development and is free to attend provided registration is made by September 22nd.
By way of a little background, the Ohio Capital Fund is a statutorily created “fund of funds” governed by the Ohio Venture Capital Authority and currently managed by Buckeye Venture Partners, LLC. Buckeye Venture Partners is a joint venture between Fort Washington Investment Advisors, Inc. (“Fort Washington”), a Cincinnati-based registered investment advisor and private equity manager, and Peppertree Partners, LLC, a Cleveland-based registered investment advisor and private equity manager owned by Fort Washington. The fund of funds invests in venture capital funds that are committed to investing in Ohio companies, currently a total of 22. According to this article in the Columbus Dispatch, “those 22 funds have invested more than $250 million in 45 companies that, together, now employ more than 1,600 people in the state.”
I have attended this event in the past and plan to attend again this year. It is probably the largest gathering of financiers and entrepreneurs in Ohio, and is great opportunity for networking and to learn about the industry.
For more information, visit the Ohio Capital Funds website here.
Fenwick & West 2010 2nd Quarter Venture Capital Survey
Fenwick and West has released its 2010 2Q Venture Capital Survey. The survey shows that the climate for VC financing is improving. For the fourth quarter in a row, up rounds exceeded down rounds (55% to 27%, with 18% of rounds flat), and this was an improvement over 1Q10, when up rounds exceeded down rounds 49% to 32%, with 19% of rounds flat. (Down rounds are when a company raises money at a price per share less that that used in a previous round, generally a sign of lessened expectations for the company’s success.) In addition, the survey showed an average price increase of 30% in 2Q10, compared to 21% in 1Q10. Perhaps more significantly, DowJones VentureSource reported that the amount invested by venture capitalists in the U.S. in the second quarter of 2010 was approximately $7.7 billion in 744 deals, a significant increase from the $4.7 billion invested in 602 deals in 1Q10.
F&W’s press release summarizing the results, and a link to the full report can be found here.
New Law Shrinks Pool of Potential Angel Investors
The House and Senate reached a compromise late last night on the Restoring American Financial Stability Act of 2010. The reforms are fairly sweeping, and I’m not going to attempt to explain them all. The changes to the definition of an accredited investor merit discussion, though, as they will have a negative effect on access to capital for startup companies.
Google (YouTube) Prevails Against $1B Copyright Infringement Claim
The sound you heard today was a collective sigh of relief from entrepreneurs and corporate executives across the globe that have built business models around user-generated content. Google has, at least for the moment, successfully defended the “YouTube model” against claims that it promotes copyright infringement. Google’s defense was based primarily on the Digital Millennium Copyright Act (the “DMCA”), which protects online service providers from liability for copyright infringement based on content uploaded by users as long as they meet the conditions for the statutory “safe harbor”.
Venture Capital Firms and Angel Groups with a Focus in Ohio
Ohio-based startups and early-stage companies looking for capital may not have the same options as those on either costs, but there are quite a few Venture Capital Funds and Angel Groups who have stated a focus of investing in the Midwest region and in Ohio in particular. Over twenty funds have received investment from the Ohio Capital Fund, a state-created fund of funds that requires funds they invest in to invest in Ohio. I’ve used Google Spreadsheets to compile a chart with basic information about these sources of capital. I plan to update this chart as circumstances change and as I become aware of funding sources I’ve failed to include. Please feel free to contact me or leave comments with suggestions for additional listings.
The chart is embedded below the jump, but for a more readable version, click here.
Stay Informed
