A Non-Disclosure Agreement (also known as an NDA or confidentiality agreement) is meant to protect a business from its employees misusing valuable proprietary information.  Often it is a good idea to have a confidentiality agreement in place with each of your employees (regardless of position).  For instance, your receptionist and salesperson might have access to your customer lists, which your company would deem confidential.

You should not use a “form” NDA that you download from the internet or obtained from another business.  Your NDA should be customized for the facts and opportunity at hand and more importantly, for your particular business.  It is important to keep in mind that your company’s confidentiality which is designed for the purpose of a “business-to-business” transaction (where both corporate parties disclose confidential information to each other) won’t suffice for the employer-employee relationship.  You should consult a New York Business Lawyer (or corporate attorney) to prepare your company’s employee confidentiality agreement.

Your employee non-disclosure agreement should be specific as to what is considered “confidential information” and also include things that the employee ought to reasonably know is confidential.  You should also include company trade secrets (see “When Do You Need a Nondisclosure Agreement (NDA)?” for more discussion about Trade Secrets).

Your corporate attorney should set forth for what purposes the employee can use the confidential information and how he or she can use the confidential information (may not be removed from the offices, no reverse engineering, no copying, etc.).  Of course, you need to have provisions specifying what the employee must do with the confidential information when his or her employment ends.

Your company lawyer needs to add “teeth” to the NDA stating that employee indemnifies the company for any breach and that the company may resort to any remedy at law or in equity to enforce its rights in the proprietary information (this means the employee could be sued for monetary damages as well as enjoined from using the information).

Of course, depending on what your business does, an employee confidentiality agreement may be part of a more encompassing agreement that includes provisions limiting the competitive activities of an employee when he or she leaves your company (sometimes referred to as a “non-compete agreement” or “forfeiture for competition agreement”) and requiring the employee to disclose prior inventions (and promise to either not include the prior invention in what they create for your company and/or grant your company a royalty free license to otherwise use the prior inventions).

Lastly, like protecting trade secrets, it is not enough to merely have non-disclosure agreements (confidentiality agreements) in place — your company needs to implement policies and procedures to maintain the secrecy of your company’s confidential information.

I recommend that you consult with a New York Business Lawyer to prepare your company’s employee confidentiality agreement, “non-compete agreement” or “forfeiture for competition agreement” to help ensure the best ways to protect your company’s confidential information and competitive edge.

There are plenty of reasons to have an NDA.  I will limit this post to discussion of using an NDA between technology businesses in an arms-length transaction. More often than not, for whatever reason, whenever there is a technology related transaction at hand, the parties want to sign nondisclosure agreements right away.   On one hand, it is very advantageous to make sure your confidential information and trade secrets are secure.  On the other hand, I don’t advise exchanging confidential information with strangers right away.  Regardless of whether there is a signed NDA in place, it is best to keep your secrets to yourself until your interest in the opportunity at hand is piqued to the point where you believe the potential relationship might get serious.

Up until that point, a technology company can demonstrate its capabilities without necessarily disclosing the “secret sauce” of “how” it does it (note, if the capabilities are is as much a secret as “how” it does it, then this may not apply).

You should not sign a “form” NDA. Each NDA should be customized for the facts and opportunity at hand. You should call us (or another New York Business Lawyer or corporate attorney), highly experienced in business and technology matters to review, negotiate and revise any form NDA presented to you to sign.

A Nondisclosure Agreement is more than a commitment to keep your confidential information secret — you also don’t want the other party to use your confidential information for their own benefit.  You want to protect your ideas with the NDA.  As the old saying goes (absent a promise to keep a secret), “ideas are as free as the wind.”  Copyrights can protect your “expressions” of an idea (like music, a novel, software code, or a photograph or painting, among other things); and a patent can protect your idea that is used to create a nonobvious and useful invention.  But an idea is free to copy – so you need to protect them as a secret.  This means that other party should never be able to use your idea freely; a well drafted NDA should limit the purposes for which the confidential information may be used.

Trade Secrets.  A trade secret is an idea that derives independent economic value from not being generally known to the public or readily ascertainable by proper means by third parties who could obtain economic value from its disclosure.   You can’t just say that some information about your business is a trade secret.  You have to take efforts to keep it secret (like keeping the formula to Coke in a safe and have employees sign NDA’s).   You should also take care in the NDA to distinguish the treatment of confidential information and trade secrets.  This is important because most NDAs have an expiration date after which a party is free to reveal the confidential information (e.g., either an express term or a certain period of time following the date of disclosure).  You never want an expiration date with respect to the obligation of keeping a trade secret confidential.  You also never want to have too long of a term to keep regular confidential information secret (especially in the world of technology where the information could be obsolete in a couple of years).

Having said this, if you’re revealing a trade secret, which you should do in the rarest of occasions, the obligation to maintain the secret should be an absolute must, and in all events, last forever.  This is because once an obligation to maintain the information confidential is gone, then it no longer can be deemed a trade secret (the toothpaste is out of the tube and cannot be put back).  Courts will not protect your right in that trade secret after you’ve consented to it being publicly revealed.

**This post is for informational purposes only, For legal advice contact a business lawyer**

As you may know, a “corporate kit” includes a pre-made form of limited liability company operating agreement.  There is no telling how complete these are and whether or not they were prepared by a corporate attorney.  Certainly an off-the-shelf operating agreement is not customized for your needs.  I recommend having a New York Small Business Attorney (corporate attorney) review and/or draft and negotiate the operating agreement — especially when you have two or more members.  Here is a checklist of some of the items to consider addressing in your operating agreement (for that matter, these are some of the items that you should consider addressing in a shareholder agreement or a partnership agreement).

• General Provisions
  • Purpose of LLC — Will this be a special purpose entity?
  • Scope of activity — Geographic boundaries, etc.
  • Limitations on operations — Incurrence of indebtedness, other?
  • How many classes of membership?  What are the membership rights and obligations of each class?
• Capital Contributions to the LLC
  • Have there been any to date?
  • Percentages
  • Additional contributions
    • Ability to call
    • Default provisions (straight dilution or penalties?)

• Governance of the Limited Liability Company
  • Day-to-day management of the LLC
  • Company opportunities
  • Conflicts of interest
  • Major decisions
  • Indemnification
  • Resolution of deadlocks
    • Arbitration
    • Buy/Sell
      • Methodology for determining price — By Triggering member, Appraisal, or Arbitration?

• Distributions of Profits / Allocation of Losses
  • Timing
  • Amount
  • Capital vs. profits
  • In-kind distributions

• Admission of Additional Member(s) to the LLC
  • Any new members contemplated?
  • Terms and conditions of admission

• Withdrawal of Member from the LLC
  • Ability to withdraw
  • Confidentiality
  • Non-compete
  • Other considerations?

• Transfers of LLC Membership Interests
  • Permitted?
  • To estate planning vehicles
  • To family members/affiliates

• Third party transfers
  • Right of first offer/right of first refusal
  • Other conditions to transfer

• Termination of the Company
  • Fixed term?
  • Trigger events?
  • Standard (involuntary bankruptcy, court order, etc.)

Of course, it is best to discuss the above New York LLC Operating Agreement Checklist with a New York Small Business Lawyer.

As a corporate attorney, I am frequently asked for a checklist of items to consider when starting a business.  Here is a “10,000 foot” overview of what needs to get done in starting or buying a large or small business in New York:

• Choose Your Business Structure

What type of structure is right for your small business?  In New York, your choices are: sole proprietor, partnership, corporation or limited liability company.  You should speak with your accountant/financial advisor to see what structure is the best for your tax situation and speak with an attorney to discuss various structure options.  Also, you will want a structure that is flexible as your business grows. For example, if you hope to attract investors (or even become a publicly traded company in the future) a limited liability company or corporation might be a good structure.  Of course, forming a New York limited liability company has the added expense of publishing the formation of your LLC in two newspapers (see my other post about LLC vs Corporation).  Keep in mind, a sole proprietorship does not offer the limited liability protection of an LLC or corporation.

You should formalize your structure with a written agreement signed by the business principals and by filing the proper documents with the Secretary of State of New York.  Please note, if you are doing business with other people without the proper written agreement in place, you may be in a de-facto partnership without knowing it (e.g., your partner could enter into agreements and monetary obligations in the name of the partnership and all partners would be liable for those obligations).

• Choose a Name for your Business

New York has laws regarding certain naming conventions that must be used.

Corporations must contain the word “corporation”, “incorporated” or “limited”, or an abbreviation of one of such words (click through to Laws of New York (bottom of page) to see Section 301 of New York Business Corporation Law (BCS)).  Also, the name of the corporation cannot be the same as any other New York corporation, limited liability company or limited partnership.  Search the New York Corporation and Business Entity Database for existing business and not for profit corporations, limited partnerships, limited liability companies and limited liability partnerships, as well as other miscellaneous businesses.

New York regulates or prohibits the use of certain terms in corporate names (or only allows them after approval).  For example, certain phrases must have a legend so not to be confused with a   “governmental agency”.  You cannot use certain terms like “state police”, “urban development”, “chamber of commerce”, “state trooper”, “urban relocation”, “community renewal”, and “tenant relocation”, among other names.  Also, certain names have additional requirements or approvals like “bank”, “guaranty”, “insurance”, “trust”, “doctor”, and “lawyer”.  (click through to Laws of New York (bottom of page) to see Sections 301 and 302 of New York Business Corporation Law (BCS)).

Caution should be used to not name your small business company in a way that might be confusingly similar to an existing trademark.  You should also consider a corporate name that is available as a domain name (however, that may mot be as important if you have a domain that has brand appeal).  If your company will be doing interstate business (across state lines), may want to protect your corporate name with a trademark or trade name under federal trademark laws (check out the U.S. Patent and Trademark Office’s FAQs) or state trademark and trade name laws.

• Form Your Large or Small Business.  Once you have selected the name of the company, you need to form the business by filing the proper documentation with the New York Department of State.  See the Division of Corporations website for FAQs regarding the different entity requirements or engage a New York Business Lawyer as your corporate attorney.

• Enter Into a Written Agreement with your Fellow Business Owners.  If you are going into business with other people, you need to enter into a written agreement with them setting forth the rights and responsibilities of the owners — this generally is in the form of an operating agreement (for a limited liability company), a shareholder agreement and corporate bylaws (for a corporation), or a partnership agreement (for a partnership).

• Get a Tax Identification Number and Learn about your Tax Obligations.  Speak to your financial advisor or accountant, but generally it is a good idea to have a separate federal tax IS (or EIN) even if you are a single-member LLC (select a “disregarded entity”).  Here is the link to the IRS’ How to Apply for an EIN (with separate instructions for Corporations, International Businesses, Partnerships, and Small Business/Self-Employed).  Your applying by telephone is sometimes easier than via the online method.

As a New York small business owner, you need to understand your New York State tax responsibilities (Recordkeeping, Hiring employees, Selling products or services, and other New York State taxes).  The New York State Department of Taxation and Finance site has a lot of information for those starting or buying a business.  Also, you should read the IRS’ “Publication 583 Starting a Business and Keeping Records” is available as a pdf download or viewable on the IRS web site.

• Open a Business Bank Account.  Once you have your federal tax ID, you should open bank account(s) in the name of the business.  You should consider a bank with “commercial” services — in my experience its better to avoid “retail” banks that don’t have a lot of experience in sophisticate business needs.  Generally the bank will need to see your business entity formation documents (including banking resolutions).  The bank can provide you with generic banking resolutions, but if you are incorporated, you should include these in your corporate by-laws (with specific banking resolutions and officer powers).  If you have questions, you can call a New York Small Business Attorney.

• Get the Necessary Licenses and Permits Necessary for your Business.  Go to the New York State’s Online Permit Assistance and Licensing website to see what permits and licenses are required and call a New York Small Business Attorney.

Have a New York Small Business Lawyer review and/or draft and negotiate the important business agreements, including, among other things, the business owners’ agreement (operating agreement, shareholder agreement and corporate bylaws, and/or partnership agreement, as the case may be), office and other commercial space leases, contracts with your customers and vendors, web site development and hosting agreements and any technology/intellectual property licenses.

Of course, it is best to discuss the above New York Small Business Startup Checklist with a New York Small Business Attorney (or corporate attorney).