Weighing the Risk of Disclosure to Potential Investors

When starting a company, many entrepreneurs seek funding and expert advice. To get both, they will have to tell people what they’re doing or what they plan on doing. There’s a risk of disclosure to consider.

But when disclosing the “big” idea or IP secrets, what are the risks that someone will copy the work or use the IP?

Is disclosure worth it?

To get off the ground and fly, many startups need information and money from others. Without sufficient funding and knowledge, startups may wither and die. If this is the situation, the risk of not disclosing information may be far greater than the risk of disclosing it.

The risk of disclosure varies dramatically depending upon many factors. Some of the important considerations include:

  1. the identity of the information receiver
  2. the type of information disclosed and the level of detail
  3. legal protections in place

1. Identity of the Information Receiver

First, one of the most important considerations in weighing the risk of disclosure is the identity of the receiver.

Are they reputable? Are they professional? Are the family?

There is a world of difference between disclosing your business plan to a professional investment firm and another company who may invest in your startup however has the potential to compete with it.

It is not in the best interests of a professional investment firm to use your information. If they did, their reputation and business would ultimately suffer.

In contrast, if you disclose your plans to a potential competitor without precautions, you may be putting your business in peril.

2. The Type of Information Disclosed and the Level of Detail

Another important consideration is the type of information you are disclosing and the level of detail.

Are you disclosing a very general idea that can’t be protected by IP law anyway or confidential information and the detailed specifics of your business plan?

Are you disclosing a detailed prototype?

Are you disclosing source code that you want to protect as a trade secret or code you are allowing others to use?

Are you disclosing a potentially patentable invention?

The greater the level of disclosure the greater the risk.

3. Legal Protections in Place

Another key consideration is whether you have any legal protection for the specific type of information you are disclosing.

Your name

A federal trademark registration for your business or product name gives you rights against people who use your name and create consumer confusion. Commercial use of the name also gives you some common law rights.

Trade secrets

If you are disclosing information that can be protected as a trade secret, a non-disclosure agreement (“NDA”) with the receiving party can prevent unauthorised use or disclosure.

Most professional investors, however, will not sign an NDA.

If you don’t have an NDA, you may want to think carefully about the level of detail that you disclose. If you disclose trade secrets without an NDA, you may lose some legal protection under trade secret law for failing to take reasonable measures to protect your trade secrets.

Some companies who are potential investors or business partners may sign an NDA under some circumstances.

Potential inventions

One patent lawyer I know said, “Disclosing a potentially patentable invention without a provisional application on file with the PTO is like having unprotected sex. You may really want to do it however it’s risky.”

If you disclose a potentially patentable invention, it is best to have a provisional patent application on file that protects your priority as an inventor.

If a patent eventually issues, you will have legal recourse against infringers even if you disclosed the invention to them at an early date.

On of the my favourite cases involved the intermittent windshield wiper patent. The inventor Robert Kearns filed a patent application for the invention prior to disclosing it to the big auto makers and trying to license it them. When they used the invention without a license, he sued them for patent infringement and eventually won millions.

Copyrighted works

You may also have automatic legal protection for some creative work fixed in a tangible medium under copyright law. For example, software may be protected by copyright law. A key issue is whether your startup actually owns the copyright. However if it does, it may have legal recourse against those who copy the software or create derivative works without authorisation.

When talking to investors, consider their reputation and think carefully about the type and details of the information that you disclose.

The money and expert advice may be well worth the risk.

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