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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:
    1. 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]
    2. 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]
    3. 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]
    4. 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]
    5. 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:

    1. Could the person/organization implement the idea? (i.e. Do they have the resources?)
    2. Are they likely to use their resources to implement this idea, given their core business? (i.e. resource scarcity, business fit, likely return, etc.)
    3. 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

    1. 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]
    2. 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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