The most important assets that startup companies own is their intellectual property. But IP can be difficult to protect during fundraising because venture firms reviewing confidential pitch materials don’t regularly sign NDAs, as is traditional in other industries, and applicants have no leverage to push them.
Venture companies are often involved in multiple deals, so the need to protect one’s intellectual property during early fundraising is far from theoretical. Suppose Company A offers a healthcare-focused fund for pre-seed or seed funding and the fund refuses to invest. The fund later gets a pitch from Company B, a healthcare company in a similar space, and decides to invest this time.
Because Company A and Company B do similar things, the fund can be incentivized to provide some of Company A’s ideas to Company B. This leaves Company A with the difficult choice of whether to fight a competitor in the marketplace or in court.
What steps can startups take to protect their IP during fundraising so they don’t end up like Company A? Below is a global overview of the legal landscape and some considerations and strategies to reduce the risk of IP theft.
If a non-disclosure agreement isn’t a realistic option, the next best thing founders can do is state as much as possible that pitch materials shared with funders are confidential.
Which material can be protected
Not all concepts developed by startups are legally protected, even if a founder would consider them confidential or proprietary.
Trade secrets are the most recognized category of information to be protected. These are defined in federal law and many state laws as tangible and intangible “financial, business, scientific, engineering, economic, or technical information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes , procedures, programs or codes.”
While the trade secret definition covers many types of information, that information should be relatively concrete.
In addition, some jurisdictions, notably New York and California, protect more abstract business “ideas.” Generally, a startup’s business ideas are protected if it has operations or engages in fundraising activities in these jurisdictions. While New York requires a business idea to be “new,” California does not.