Pete Tormey’s ebook “Startup Guide to Intellectual Property: Early Stage Protection of IP” is a great resource for founders on startup intellectual property. This blog post includes excerpts from the “Protecting IP Early” chapter that focus on protecting startup secrets early in its existence.
In the Beginning Was the Doodle: Protecting Startup Secrets
The following is a condensation of key points in “Protecting IP Early” chapter of Pete Tormey’s “Startup Guide to Intellectual Property: Early Stage Protection of IP” that relate to protecting startup secrets early in its existence.
In the Beginning was the Doodle
The proverbial startup originates on a napkin over cocktails or a coffee. Some startups are well planned and highly orchestrated; others just seem to happen. But even the most experienced entrepreneurs often neglect their intellectual property.
The reality is that mistakes you make identifying and protecting your intellectual property are rarely immediately fatal to a startup in the same way that a breakdown in team dynamics or lack of customers is. But they can prove costly to a successful startup and are worth paying attention to.
Your “Secret Sauce” Makes Your Product Better, Faster, and/or Cheaper
The “secret sauce” of every startup is the one solid product or activity that will separate your business from all the others. For a conventional business to be successful, your secret sauce must make you faster, better, or less expensive than the competition. Ideally, you can hit at least two of the three. But disclosing your secret sauce recipe to the wrong people is always a bad idea. Be careful, but not paranoid. Some startups never start because the founder is too afraid to tell anybody his big idea. At some point, you’ll need to trust someone, because you will need that person’s help to start your business.
Pete Tormey’s “Startup Guide to Intellectual Property” offers practical insights for founders on defining, managing, and protecting their intellectual property. One key point is that you explain what your product does, who it for, and when and where they can use it, without having to explain how it does what it does. The number of people who have to understand the details of how you have implemented your product are normally very few–but not zero.
Protecting Startup Secrets
- Who to Worry About Most? Although there are no hard and fast rules, there is a kind of a hierarchy for information sharing built on the level of risk you might suffer. Most startups fear that major companies are the most likely to steal their ideas. True perhaps, but big companies suffer from inertia, and even if they know your idea, they are very slow to act. Similarly, small businesses are also not in a position to act, because they tend to be resource limited. The people most likely to harm you if they have your secrets are the companies that are already in your market space and can easily adapt to your idea. It’s your job as an entrepreneur to identify those threats and keep them at bay. Whenever possible keep your secret sauce to yourself.
- Non-Disclosure Agreements (NDA) might help. Sometimes called a confidentiality agreement or secrecy agreement, a non-disclosure agreement (NDA), is a legal contract between the parties that describes the confidential information that the parties want to share with each other, as well as their agreement not to disclose that confidential information. There are pluses and minuses to an NDA, but before we go into those, be sure your agreement is a valid one.
- NDA’s must clearly spell out who the parties are and describe what is confidential. Many startups simply download a generic NDA and fill in the most basic information. It is essential that there be enough information in the agreement for people to know exactly what the agreement covers. Many commercially available and well-written NDAs require that confidential information be marked “confidential” to be covered in the agreement. The problem is that startups usually discuss their ideas orally and nothing is set in writing that can be marked confidential. If you use a downloaded NDA, be sure to describe your idea with enough detail to protect you. “My idea for a flying car” is not sufficient. However, “My idea for using duct tape and tooth picks to make a car fly” gives the court something to work with when it has to decipher what is confidential.
- Most professional investors won’t sign an NDA. They see many business plans and do not want to make themselves sue-able by signing an NDA. That’s reasonable. But it’s a mistake to think a potential investor will maintain your secret as a matter of honor. Venture funds tend to invest in a small market space. Before you hand over your secret sauce, do your research; make sure that investor is not already invested in your competition. After all, they don’t know what you are about to tell them. If they are already invested, or about to invest, in a competing firm, you’ll only burn yourself by spilling your secret sauce. If there’s a potential for conflict, find another investor.
- But most other businesses will sign and honor an NDA. The advantage to an NDA is that it operates to minimize disclosure of your confidential information. Smart business people want to avoid lawsuits, so they will tend to honor their NDAs. Also, reputable firms honor privacy agreements even if they aren’t written down–simply because they are reputable firms.
Telling only those who need to know is the first principle in protecting startup secrets, and non-disclosure agreements are the easiest way to indicate to someone that what you have told them is secret: they are an essential component in the protection of your corporate secrets. With the notable exception of professional investors–who often do not need to know your startup secrets, only their impact on your customer’s business–most other businesses will sign and honor NDAs.
Related Blog Posts
- In the Beginning Was the Doodle: Defining Startup Intellectual Property
- Podcast with Pete Tormey on Forming a Team, Dividing Equity, and Gaining Early Traction
- Podcast with Pete Tormey: Bootstrapper’s Delegation Checklist
- Legal Advice: Start With a Plain English Agreement That Covers Key Deal Points
- When to Incorporate and Options for IP protection
- Legal Issues: Q&A with Pete Tormey of Action Patents My first conversation with Pete for the blog in 2007 when he was a registered patent agent.