The Perils of Disclosure for Startups

Posted on Tuesday, September 8th, 2015

Startups generally have an idea, connections, or talent, or some combination thereof. To be sure, there are plenty of startups out there doing what everyone else is doing – another landscaping company, another food truck, etc. But there are plenty of startups that are experimenting with disruption and “something different.” These latter startups have greater concerns regarding the protection of their intellectual property or “IP” rights, the ideas and know-how behind the new venture. These concerns are often valid as a startup can jeopardize its ability to obtain certain IP rights and there are generally several players in the market that can take your idea, disclose it, or get it up and running faster than the average startup or entrepreneur.

A startup can feel pressured to disclose ideas in several scenarios. For example: recruiting, raising capital, “pitch” competitions, beta testing, working with independent contractors, etc.

Consider a few common scenarios:

Recruiting. Talented people are not always willing to risk their livelihood on your company unless they know a bit more than the general public about your IP or your game plan. Many of these folks are not willing to sign a confidentiality agreement to learn this “extra” information and make a decision. Many of these folks live in jurisdictions that would make it difficult to enforce the confidentiality agreement even if it was signed by the potential recruit. When in doubt, consult an attorney who has experience dealing with confidentiality agreements (and cross-border transactions, if necessary).

Co-collaboration, Co-working and shared work spaces. Want to bounce an idea off of a fellow shared work space buddy? Want to have a phone conversation in a space designed for technology incubation? Ideas have been stolen in these scenarios.  Does the membership or rental arrangement offer any protection for confidential information? Often entrepreneurs think they are going into business with another “co-founder” – without having a corporate structure or confidentiality obligations in place. Tech incubators and co-collaboration environments can be helpful – but they are not without risk.

Raising Capital. A startup can give a lot to a venture capitalist or angel investor without needing a signed confidentiality agreement (certain market data, what the public already knows about the startup’s product or service, etc.). But let’s face it, not many investors out there will invest without knowing the full picture. The problem is that plenty of investors won’t sign a confidentiality agreement. And most take the position that they will never sign confidentiality agreements, even though sometimes they will. How is an investor to know which is which? Well, if you are a startup you have less leverage on the confidentiality agreement conundrum than an established company. But if you are in a specialized field or talking to a newer VC without a ton of deal flow, some investors will be willing to afford you the protection you seek through a confidentiality agreement (with varying degrees of protection – depending on the situation).

How can a startup protect its, sometimes valuable, IP? Here are a few action steps to consider:

  1. Use good judgment. Are the folks you are dealing with legitimate? Do they have good reputations and references? Or is the other side looking to get something for nothing? Do you feel comfortable with disclosure? Does the recipient have a vested interest in keeping your information confidential?
  2. Use good confidentiality and non-disclosure agreements. One size does not fit all when it comes to legal agreements. Seek maximum protection and reduce protection only when the risk v. reward analysis dictates.
  3. Register trademarks and copyrights, and file patent applications (to notify others of “patent pending” status which may block competitors and to protect any improvements to the product).
  4. Act like you care about confidential information. Mark things “confidential” that you want to keep confidential. Use locks, encryption, authentication, secure networks, etc.

Some startups take huge risks and get lucky with timing and confidentiality. Others work tirelessly for years, then get burned and see all that work evaporate for failure to protect confidential information and IP rights. Attorneys can seem expensive to a startup, especially a new entrepreneur. But if you find a good one, they are worth it. Consult an attorney about your ideas and how to maintain information in a confidential manner in order to minimize risk, preserve rights and allow you or your group to maintain focus on solutions, growth and business.