Protecting Your Ideas
Q: What are the necessary steps to take in order to protect my ideas while
seeking capital?
- Most experts agree that sharing your ideas while seeking capital is not only sound, it's
necessary. While discretion is important, one must not become paranoid. For while you may
think your idea is extremely unique, there are very few original thoughts. Executing the
idea is what will set you apart.
As Charles Heller, Director of the Michael Dingman
Center for Entrepreneurship, University of Maryland stated at the Early Stage Funding seminar last summer, "The area of
disclosure constantly leads to paranoia among high-tech entrepreneurs. I see more people
who don't ever get anything funded and never build a company because they intend to keep
their thing a secret. They want people to put in money, but they're not going to tell them
anything about what they do, or at least the details. If you are so obsessed with control,
you probably don't have anything that's worth controlling. Investors are not interested in
controlling the company, just as they're not interested in stealing your idea and giving
it to someone else and starting another company."
While you should be careful to whom you tell your ideas, don't get paranoid. The people
that can help you make it into a success can't help if they don't fully know the idea.
Most professionals (consultants, venture capitalists, etc.) are good about keeping things
confidential since their reputation is on the line. If you are dealing with a reputable
firm, they will respect your confidentiality; it is a hallmark of their business.
[Kyp Sirinakis, Jeffrey Davison, Triad Investors Corporation]
- The supply of ideas is endless. Mario Morino believes that in the Web world, "there
are probably ten people ahead of you someplace in the country" at all times. Ideas
that are very unique and perishable... are few and far between." John C. Darrin adds,
"You will find there are very few idea thieves. Like anything else, it is supply and
demand and the supply of ideas is endless."
Jack Biddle of Novak Biddle makes the
important point that "It's execution, not an idea, that makes things work. That's
where the money is going to be made." Mario Morino adds, "The key is moving on
your idea, getting a prototype and getting out there fast into that market so you can get
to a customer, try it, adapt it, make it successful and execute."
"If you find someone who shares your excitement for your idea, in most cases its
because of the energy and excitement you give it. This energy is what it takes to make an
idea a reality and that is hard to duplicate."
[Bob Gaudian, rgaudian@classic.msn.com.]
- Here are some important pointers to keep in mind when sharing your ideas with a funding
source:
- Entrepreneurs should prepare a "non-confidential" executive summary of
business plan and/or a full blown business plan which alludes to, but does not disclose
the "crown jewels". A venture investor will be able to determine preliminary
level of interest on this basis alone.
[Jeffrey Davison]
- If the potential investor calls to express interest in a meeting, find out whether that
fund has an investment in a company that you might construe as a direct competitor. Some
funds will invest in companies which compete, others will not.
[Jeffrey Davison]
- After the basis of a one-on-one meeting, use your own judgment as to when to disclose
proprietary information, and how much.
[Jeffrey Davison]
- Get as many "bricks and mortar" laid as possible before discussing the idea
broadly. The more traction you have in moving from a concept to an actual business, the
less risky disclosure becomes.
[Leslie A. Williams, law@consumerinsites.com]
- While odds are that your idea is not the type that can be patented, you can try to file
a patent application before you disclose your idea to others.
[Maurice Boissiere, Evan Smith, Andy Forbes]
Q2:What about non-disclosure agreements (NDAs)?
- From an investors point of view, NDAs are not a good idea. Leslie A. Williams of
Consumer Insites says, "You can't start a business "in a vacuum", so
unfortunately part of the risk is in disclosure. A good non-disclosure agreement helps
offset some of this risk, although some investors may be reluctant to sign."
According
to Mario Morino, going through the trouble of signing an NDA is rarely worth it. After all
the red tape, "We find that they have nothing to tell us that we didn't know before
the meeting started. And by the way, that tells us a lot about them." He thinks that
because we've been around the security community in this region, we've become somewhat
paranoid.
John May, Founder and Executive Director of the Private Investor's Network feels even
more strongly about NDAs. He believes that it's vital to disclose what you are doing to
get some feedback. Shop your ideas. Publicize. You're trying to get people's attention.
There is a lot of activity out there, so you have got to get in front of people.
Jeffrey Davison of Triad Investors Corporation explains the problems with signing an
NDA: "We don't like to sign non-disclosure agreements because: 1) we review hundreds
of business opportunities every year and, if we signed one every time, we would create a
smoldering heap of contingent liabilities and very little control over those liabilities;
2) we turn down lots of companies and want to avoid people taking pot shots at us; 3)
technology changes so quickly that the "proprietary" information quickly becomes
obsolete and therefore the need to have an NDA goes down, particularly in software."
If you still believe you need protection, use the following criteria to decide the
importance of using a Non-Disclosure Agreement:
- Could the person/organization implement the idea? (i.e. Do they have the resources?)
- Are they likely to use their resources to implement this idea, given their core
business? (i.e. resource scarcity, business fit, likely return, etc.)
- Are they likely to "steal" the idea? (This may be a character issue, or it may
be a case of "I had been thinking of something similar for a while...")
Q3: Once you go to market, what kind of protection is there from large companies
copying the idea?
- The general consensus is that there is no protection. As Jim Kimsey, Founder and
Chairman Emeritus of America Online said at An Evening With The Barons, "Always
remember and never forget a big company will always screw you. It's part of their nature.
They can't help it. It's just what they do. If you know that and understand it, then you
will position yourself to take advantage of whatever relationship you are going to have
with [the large companies]."
So you've just got to jump in. Bill Melton, Founder
of VeriFone and Founder and CEO of CyberCash advises that you build your perimeters of
defense. "You have to figure out how to make money, how to defend it, how to sustain
it, and then, finally, you have to make sure that you know how to grow it. You cannot sit
down at the beginning and say what is going to be your perimeter of defense. When you get
into it, you figure out what you do, because at that point you know your business better
than anybody else and you won't know your business until you get into it."
In the Internet world, all you can really hope is for a first-to-market lead. Russ
Ramsey, Co-Founder of Friedman, Billings and Ramsey & Co. believes that, "You've
just got to do it. There are very few companies that'll ever have the opportunity to set
the standard. At the end of the day, you can only hope for mind share that leads to market
share. You'll have a six-month, maybe a one year window if you're lucky."
Resources
- For information on how to protect your ideas before disclosing them, you can get a good
start with the "basics" articles at the "Intellectual Property Resource
Center" on the Netpreneur website. See http://netpreneur.org/advisors/ip
. The "Strategies" article on low-cost patent strategies talks about early
patent filings.
[Evan Smith, esmith@sixbey.com]
- The Virginia Center for Innovative Technology, www.cit.org,
offers some programs to help advise on whether their idea has any market feasibility.
[Kyp Sirinakis]
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