Keeping It Confidential
Making the most of your intellectual property when seeking investors means making sure it’s not compromised.
From: Inc.com
As mentioned in last month’s column, your approach to making the most of your intellectual property (IP) is one of the factors that potential investors and/or co-venturers typically consider when making a decision about whether or not to invest in your company. It is important to keep confidentiality in mind when dealing with potential investors and co-venturers.
Can you assume that information provided to a potential investor or co-venturer remains confidential? The answer is, pure and simple, no! Under most circumstances unless there is a contractual obligation to the contrary, they can use (and tell others) any information that you give them. And worse, in most cases if you disclose information to anyone that is not under an obligation of confidentiality, the “confidential status” of that information is lost not only with respect to that prospect but also with respect to everyone else.
How do you create this “obligation of confidentiality”? The best way is with a written confidentiality or nondisclosure agreement (NDA), although an oral agreement can sometimes be enforced (if you can prove there actually was such an agreement). Simply marking a business proposal “confidential” and sending it to a prospect does not work — this “proprietary legend” does not create an obligation of confidentiality. Likewise, sending the confidential information with a proposed confidentiality agreement for the prospect to sign is a dangerous proposition. You want a signed confidentiality agreement in hand before you provide any confidential information.
Do you always need a written agreement to establish an obligation of confidentiality? Not always, but the exceptions are rare, and most often do not apply to situations where you are seeking investors or co-venturers. For example, you can sometimes show that an obligation of confidentiality has been assumed by a prospect through your history of prior dealings with them (referred to as “course of dealings”). However, this can be extremely difficult to prove, and in any event, the precise extent of the confidentiality obligation is typically limited or uncertain without a definitive written agreement. An obligation of confidentiality with respect to certain types of information also can be imposed by law when certain specific relationships (such as attorney-client, employee or-employee, doctor-patient) exist.
It is extremely important to make sure that the actual terms of an NDA fit your particular circumstances. Not all NDAs are created equal. Some agreements require procedures that are impracticable when applied to the actual relationship between the parties. For example, an agreement that requires all protected confidential information to be identified in writing may be just fine for an arm’s-length relationship where all communications are carefully controlled (e.g. limited to documents sent by mail or overnight delivery), but totally inappropriate in a situation where the other party has representatives visiting your facility. Other agreements place artificial lifetimes on confidentiality (e.g.,”the information will be maintained in confidence for a period of one year from the date of disclosure”) that have no basis in reality and can, in practice, hobble the IP strategy of the typical business.
In general, to protect your confidential information it is desirable that all information disclosed be protected unless it is clearly not confidential and/or can be shown to fall within certain standard exceptions. For example, the standard exceptions include information, which is already known to the public at the time it is disclosed, or which is later made public (other than by fault of the party receiving the information).
Do you need an attorney to prepare a confidentiality agreement? You are taking a risk if you do not at least have an IP attorney give the confidentiality agreement his or her blessing. There are a lot of “form” confidentiality agreements floating around. Many versions are available for download through the Internet. (In fact, I include a number of sample confidentiality agreements in my IP Tools product). The issue is whether the specific terms of a particular generic agreement fit your circumstances. It may or it may not. Do you want to deal with the consequences if the agreement is inapplicable in to your circumstances or does not cover all of your bases? I suggest that you do not. You are typically best served by having the agreement reviewed by IP counsel.
What if a prospect refuses to sign a confidentiality agreement? Many professional investors (such as venture capitalists and sophisticated angels) and large companies (potential co-venturer or licensee) are reluctant, at least initially, to sign confidentiality agreements. They tend to be concerned that they may be considering an investment in a competitive company, or have ongoing independent research on the same subject as your submission. They are afraid that they will end up in litigation if they decline to do business with you, and instead invest in the competitor or continue with their independent research.
As a practical matter, to proceed in the face of that attitude, you simply assume that “anything you say can and will be used against you.” You have to take a calculated risk — the risk that the prospect will “appropriate” everything that you disclose to them — but that risk can be minimized. Patent applications can be filed (if appropriate) before you contact the prospect. Information can be provided in stages. You do not disclose any information that is truly sensitive in your initial communications. In many instances, if the potential investor or co-venturer is sufficiently interested to take the next step, and disclosure of sensitive information is required, they are at that point willing to enter into a confidentiality agreement. If they are not, you can choose to take another calculated risk, or terminate the discussions.
Corra thinks this is a terrific article about the ins and outs of intellectual property and proprietary information. The article shows the pitfalls and vulnerabilities as well as the value attached to bartering your intellectual property with other companies and their intellectual properties.
What the article does not point out is that much abuse and theft comes from within your own company. Employees who are not carefully scrutinized often have access to intellectual property and proprietary information, like credit card databases and client contact lists. There are more than a few incidents where a business was seriously compromised by an integrity challenged employee stealing valuable proprietary information or intellectual proprietary and selling it to a rival company.
That is why Corra recommends that you run pre-employments screening on all job candidates, and periodic screenings on current employees. Besides a criminal background check, we recommend a credit report, especially for anyone who has access to proprietary information and intellectual property. People who have serious credit problems are often more susceptible to the pressures of those who are willing to pay for such sensitive information. We recommend a Social Security Trace, to validate the social security number and verify that the the number actually belongs to your job candidate. Education verification is also a good idea. It helps make sure those with access to sensitive data are qualified to use it.
As Corra says, check them out before you hire.
