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Very important First-rate companies own their intellectual property. But protecting IP during fundraising can be difficult, because businesses reviewing confidential pitch materials don’t routinely sign NDAs as is common in other industries, and applicants don’t have the leverage to push for them.
Venture firms are often involved in multiple deals, so the importance of protecting one’s IP during early fundraising is far from theoretical. Let’s say Company A sets up a healthcare-focused fund for pre-seed or seed funding and the fund is reluctant to invest. The fund will later receive a vote from Company B, a healthcare company in the same position, and decide whether to invest at that time.
Since Company A and Company B do similar things, the fund may be encouraged to offer some of Company A’s ideas to Company B.
What steps can startups take to protect their IP during fundraising so they don’t end up like Company A? Below is a broad outline of the legal landscape as well as a few ideas and strategies to reduce the risk of IP theft.
If an NDA isn’t a real option, the next best thing founders can do is communicate that pitch materials shared with funders are confidential whenever possible.
What kind of material can be protected?
Not all concepts developed by startups are legally protectable, even if a founder considers them confidential or proprietary.
Trade secrets are the most well-known category of protected information. These are “financial, commercial, scientific, technical, economic or engineering information, including patterns, plans, sets, programming tools, formulas, designs, examples, methods, techniques, procedures, processes, programs, including information, methods, plans, programs, methods, procedures, programs, etc. or codes.
While the definition of trade secret covers many types of information, the information must be relatively objective.
Some jurisdictions, notably New York and California, also protect more abstract business “ideas.” Generally speaking, a startup business idea is protected if it has any operations or fundraising activities in these jurisdictions. While New York requires a business idea to be “fictional,” California does not.
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