You have a great idea for a new business, product, service, or method of doing something.
You’ve developed a way to turn that idea into a tangible item, but you can’t actually make that item until you get some money.
You approach investors with the hope that one of them will understand your vision and give you the cash you need to bring your idea to reality.
But there are problems.
Problem #1: Information
Investors won’t give you any money unless they fully understand what you’re creating, how it will work, what makes it different from competitor items, how large the target market is, and what the expected return on their investment is.
The list of questions they’ll have for you goes on and on, and you need to be ready to answer them or your dreams of a big cash injection won’t happen. This leads to problem #2.
Problem #2: Theft
You don’t want anyone else to steal your idea and enter the marketplace first. You’d lose the coveted position of being first-to-market and all of the publicity and sales that go along with it.
Therefore, you ask investors to sign a non-disclosure agreement (NDA) before you provide any information to them, which leads to problem #3.
Problem #3: Non-Disclosure Agreements
Investors won’t sign your non-disclosure agreement until you give them enough information to make it worth their while to invest time into hearing your pitch.
Remember, investors don’t necessarily need you. They have many investment options and many startups knocking on their doors. Their interests are not the same as yours. You need to give them enough information so they’ll give you the time of day, but you need to do so in a way that protects your interests in the future.
What do you do?
Understand You Cannot Protect an Idea
First, you need to understand that you cannot legally protect an idea, even with non-disclosure agreements. You cannot keep someone else from thinking up the same or similar idea or turning it into a product completely separately from and independent of you.
Simply put, your idea for a new product or a new way to manufacture something is not protectable through intellectual property laws, but the way you plan to execute your idea may be.
The “how’s” of your idea are the proprietary parts and are where you find its true value. These proprietary elements, or those that may be eligible for intellectual property protection, are the only parts that will stop you in your tracks and harm you if they are stolen and are, therefore, the only parts that you should try to protect through a non-disclosure agreement.
A non-disclosure agreement is considered a contract voluntarily entered into by two people. Technically, you can require someone to stay mum on anything you want, including the fact that you even met with them.
For startups, non-disclosure agreements should only be used to protect information that matters.
Identify What is Proprietary
What are the specific parts and pieces that are truly proprietary? Consider how you plan to bring your idea to fruition at a granular level, and identify those truly proprietary elements. These are the important elements that a non-disclosure agreement can protect.
Make Your Choice
You have three choices, and only you can decide which is right for you based on your goals and comfort level:
1. Don’t Use a Non-Disclosure Agreement
Many investors will tell you that a non-disclosure agreement isn’t necessary, but remember, they have competing interests to your own.
That doesn’t mean potential investors want to steal your work. They are unlikely to be a source of threat. Potential competitors and even counterfeiters are the more likely threat source. However, not using a non-disclosure agreement can hurt no one but you.
2. Use a Non-Disclosure Agreement and Discuss Nothing until It is Signed
Many investors won’t consider investing until they hear how your product or service will work and the results they can expect. They won’t sign a non-disclosure until they believe it’s worth it to them to do so and believe it will benefit them.
Requiring a non-disclosure agreement upfront could reduce your chances of attracting investors, but it does ensure your proprietary information is protected (to the extent possible by law and depending on the strength of the language in your agreement).
3. Use a Non-Disclosure Agreement to Protect Truly Proprietary Information
Many investors will gladly sign a non-disclosure agreement once they believe the investment will benefit them.
Balance your need to protect information with the need to give investors enough information to consider investing in you. This would entail having an investor sign a non-disclosure agreement when you get to the point in your discussions that you need to reveal the truly proprietary information, which the agreement can actually protect.
Find the Balance that Works for You
Remember, you can’t protect your idea, without something more. You can only protect how you’re going to execute your ideas. The specific “how’s” are proprietary, and they are what you need to protect from being stolen.
Strike the right balance for you and your goals, and your efforts to attract investors should improve. And bear in the mind that the law imposes a responsibility on you to engage in a certain degree of self-help and to exercise good discretion.
Knowing what to say when and to whom is what really matters. Educate yourself, and keep in mind that the law is not as flexible as many would like it to be. If you cherry-pick who you disclose things to with and without a non-disclosure agreement, you might as well have not used one at all.
If you’re having trouble identifying the truly proprietary elements of your product, service, or process, consult with an intellectual property attorney who fully understands the current laws and can help you determine what information can and should be protected through non-disclosure agreements and intellectual property laws.