Pete Tormey’s ebook “Startup Guide to Intellectual Property: Early Stage Protection of IP” is a great resource.
Here are some excerpts from the “Protecting IP Early” Chapter of Pete’s book. They cover some of the basic concepts of intellectual property and how to protect it early in your startup’s existence
In the Beginning was the Doodle
The proverbial startup originates on a napkin over cocktails or a coffee. Some startups are well planned and highly orchestrated; others just seem to happen. But even the most experienced entrepreneurs often neglect their intellectual property; not that they don’t think about it, but they are not all that clear about who really owns what, and ultimately, how much that what is worth. In business, what you do not know can hurt you, and what you do know can make you rich. Just like real estate, intellectual property needs to be clearly defined, and its ownership firmly established.
Who Really Owns the Intellectual Property?
Intellectual property ownership is often overlooked or deferred in a young company. Startups often assume the company will own it all, but sometimes things go bad quickly and ownership can become a legal issue. The question of “who really owns the intellectual property?” might sound like a really basic question, but oftentimes it’s hard to answer. If there are joint developers, or multiple stakeholders with valid claims of ownership, then things can get messy.
- Work-for-Hire is the legal default here, when you pay someone to develop something for you, you own it. For example, if you hire someone to produce an invention you thought of, or to make some marketing posters that might be copyrightable, and you paid them to develop these things for you, then you own the rights in the intellectual property they made. If a work is “made for hire,” the employer–not the employee–is considered the legal author. However, if there is nothing in writing, disputes can and will arise. These can be costly and derail a startup business, so it’s best not to rely on work-for-hire in the abstract unless you need to. It’s better to be absolutely clear on which rights you are paying for in a written agreement.
- Outside Experts paid by you to write software for your business may use code, procedures, and subroutines that they have developed and used before they started working for you. They may also use development tools that limit their ability to pass on rights to that software. Very often industrial artisans, like graphic designers and web developers, use pre-existing art to create solutions and clarity of ownership is important. Whatever is developed for the company should belong to the company.
- Get it in Writing: even the dullest ink shines brighter than the brightest memory. Have a signed contract in which an employee or vendor agrees to transfer their rights to you in exchange for their employment. Intellectual property ownership then becomes a permanent non-issue, assuming you keep your part of the agreement by paying them. There is no good substitute for having a well-written agreement among yourselves as to who actually owns the intellectual property that you’re having developed. Even if it seems a little awkward among friends, you need to say, “Okay, who owns this? Who invented this, or what are we going to do with it?” You hate to ask that question and risk ruining what could be the start of a really good relationship, but it needs to happen, and the sooner the better.
- Consider Email: as much as I recommend a well-written agreement, if you can’t get one, at least make an email record of what you agreed to do. Here’s how it works. “Thanks for meeting with me today, just to be clear I will do… and you will do…” A series of short emails setting out what you agreed upon and what your expectations are can be very effective in settling disputes that arise later. They might not have all the formalities of a written contract, but if your email exchanges have the basics of your agreement, well… that’s better than nothing. Besides, getting in the habit of following up meetings with emails helps keep projects on track and keeps all the players on the same page. The downside to emails is that if there is a disagreement about what was agreed upon, an email might not clarify things. People don’t read emails in depth, so they often cause unwarranted confusion. Meet person-to-person (or by phone), clarify things, and then send a follow up email.
- A Simple Agreement is usually better than no agreement at all. And if the company fails, it’s nice to know who gets what. If you start a company, and you try to find investment backing for it, and the investment backing never comes through, who gets the software at the end of the day? The developer? Are you going to split it? Often, if a company is trying to find venture funding or angel funding–and they don’t get it–there’ll be some animosity among the company founders. If personal dynamics change after a failed business venture, you cannot expect people to negotiate with the same spirit that they started the company. It’s nice to know–beforehand—what will happen with the software that’s developed.
The “secret sauce” of every startup is the one solid product or activity that will separate your business from all the others. For a conventional business to be successful, your secret sauce must make you faster, better, or less expensive than the competition. Ideally, you can hit at least two of the three. But disclosing your secret sauce recipe to the wrong people is always a bad idea. Be careful, but not paranoid. Some startups never start because the founder is too afraid to tell anybody his big idea. At some point, you’ll need to trust someone, because you will need that person’s help to start your business.
- Who to Worry About Most? Although there are no hard and fast rules, there is a kind of a hierarchy for information sharing built on the level of risk you might suffer. Most startups fear that major companies are the most likely to steal their ideas. True perhaps, but big companies suffer from inertia, and even if they know your idea, they are very slow to act. Similarly, small businesses are also not in a position to act, because they tend to be resource limited. The people most likely to harm you if they have your secrets are the companies that are already in your market space and can easily adapt to your idea. It’s your job as an entrepreneur to identify those threats and keep them at bay. Whenever possible keep your secret sauce to yourself.
- Non-Disclosure Agreements (NDA) might help. Sometimes called a confidentiality agreement or secrecy agreement, a non-disclosure agreement (NDA), is a legal contract between the parties that describes the confidential information that the parties want to share with each other, as well as their agreement not to disclose that confidential information. There are pluses and minuses to an NDA, but before we go into those, be sure your agreement is a valid one.
- NDA’s must clearly spell out who the parties are and describe what is confidential. Many startups simply download a generic NDA and fill in the most basic information. It is essential that there be enough information in the agreement for people to know exactly what the agreement covers. Many commercially available and well-written NDAs require that confidential information be marked “confidential” to be covered in the agreement. The problem is that startups usually discuss their ideas orally and nothing is set in writing that can be marked confidential. If you use a downloaded NDA, be sure to describe your idea with enough detail to protect you. “My idea for a flying car” is not sufficient. However, “My idea for using duct tape and tooth picks to make a car fly” gives the court something to work with when it has to decipher what is confidential.
- Most professional investors won’t sign an NDA. They see many business plans and do not want to make themselves sue-able by signing an NDA. That’s reasonable. But it’s a mistake to think a potential investor will maintain your secret as a matter of honor. Venture funds tend to invest in a small market space. Before you hand over your secret sauce, do your research; make sure that investor is not already invested in your competition. After all, they don’t know what you are about to tell them. If they are already invested, or about to invest, in a competing firm, you’ll only burn yourself by spilling your secret sauce. If there’s a potential for conflict, find another investor.
- But most other businesses will sign and honor an NDA. The advantage to an NDA is that it operates to minimize disclosure of your confidential information. Smart business people want to avoid lawsuits, so they will tend to honor their NDAs. Also, reputable firms honor privacy agreements even if they aren’t written down–simply because they are reputable firms.
Trade secrets are legally protectable, so if you can keep it a secret you should.