The most important asset early-stage companies possess is their intellectual property. But IP can be difficult to protect during fundraising, because venture firms reviewing confidential pitch materials do not regularly sign NDAs as is traditional in other industries, and applicants lack leverage to push for them.
Venture firms are often involved in multiple deals, so the need to protect one’s IP during early fundraising is far from theoretical. Let’s say that Company A pitches a healthcare-focused fund for pre-seed or seed funding and the fund declines to invest. The fund later receives a pitch from Company B, a healthcare company in a similar space, and this time decides to invest.
Because Company A and Company B do similar things, the fund might be incentivized to provide some of Company A’s ideas to Company B. This leaves Company A with the difficult choice of fighting a competitor in the marketplace or courtroom.
What steps can startups take to protect their IP during fundraising so they do not end up like Company A? Below is a broad strokes overview of the legal landscape as well as a few considerations and strategies to mitigate the risk of IP theft.
When an NDA is not a realistic option, the next best thing founders can do is to signal as much as possible that pitch materials shared with funders are confidential.
What material is protectable
Not all concepts developed by startups are legally protectable, even if a founder would consider them confidential or proprietary.
Trade secrets are the most well-recognized category of protectable information. These are defined under federal law and many state laws as tangible and intangible “financial, business, scientific, technical, economic or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs or codes.”
While the trade secret definition captures many types of information, that information must be relatively concrete.
Some jurisdictions, most notably New York and California, additionally protect more abstract business “ideas.” Generally speaking, a startup’s business ideas will be protected if it has any operations or engages in fundraising activities in these jurisdictions. While New York requires a business idea to be “novel,” California does not.