As noted in another of our articles, Venture Capital (VC) firms will generally not sign a Non-Disclosure Agreement (NDA).
Such a situation appears to present an insurmountable hurdle. Without an NDA in place, trade secrets should not be disclosed to a VC who doesn't owe an obligation of confidentiality to the company. Of course, if you expect to receive funding from a VC, you will be required to reveal information about your venture to them.
It's important to note that while most reputable VC firms will want a basic understanding of your vision, they won't be asking you to reveal trade secrets (certainly not at your first meeting). Therefore, although the only way to protect a trade secret fully is not to disclose it, it is possible to find a balance when working with VC firms. To do this:
Often, a first step in protecting trade secrets is to properly identify all trade secrets. All trade secrets are confidential and proprietary but not all confidential and proprietary information is a trade secret. Generally a trade secret meets the following criteria:
In practice, trade secret protections apply broadly to business, financial and technical information and include: marketing plans, pricing and discount structures, production processes, chemical formulas and software source code. Client lists may or may not qualify.
As may be obvious, confidential information only has value as a trade secret if you can exploit the trade secret commercially and still maintain its confidentiality. An idea that can readily be copied or reverse engineered is not a particularly valuable trade secret.
If it is not possible to have any discussions without revealing your trade secrets, consider whether trade secret protection is really what you need. Entrepreneurs should take care to determine the best type of protection for their intellectual property. Certain inventions are better protected by a patent. These decisions should be addressed early because the most powerful limitations against patenting trade secrets are laws providing that trade secrets with applied commercial uses may not be patentable more than one year after certain activities by the first-party user of the trade secret. The inventor must file a patent application within a year of any offer to sell the invention or any public use.
For an inventor with a great idea who may lack the ability to pursue full patent protection until after a VC provides funding, a provisional patent application may be the answer. Provisional applications are placeholders for whatever is disclosed in the application, are generally less expensive than a full patent application, and provide up to one year to shop the idea around to potential VC firms before they must be converted to full applications. After the one year period, however, unless converted into a non-provisional application, the provisional application will lapse.
Getting through the dense thicket to obtain funding without losing control of your intellectual property is daunting and the consequences of poor choices are dire. However, smart entrepreneurs can find a way through this thicket with prudent planning. Entrepreneurs should identify ideas that are best protected as trade secrets and guard them closely. Broad ideas can be discussed with a trustworthy VC or protected by patent law. In this way, with careful thought and planning, protecting your intellectual property is possible.
Day Pitney Partners Stephen Catanzaro, Laurence Smith, and Elizabeth Yoo were featured in New Jersey Law Journal's 2024 New Partners Yearbook, which highlights partners, including lateral partners, made or hired at New Jersey firms.
The arrival of New Jersey Corporate Partner Elizabeth Yoo was featured in the New Jersey Law Journal's On the Move and After Hours column.
The news of Elizabeth Yoo joining Day Pitney as a partner in the firm's Corporate practice was featured in Thomson Reuters' The Daily Docket Industry Moves column. Yoo is based in New Jersey.
Day Pitney New Jersey Partner Elizabeth Yoo’s arrival was featured in the Diverse Lawyers Network newsletter. Yoo is a Corporate Partner.
The arrival of New Jersey-based Corporate Partner Elizabeth Yoo was featured in the Law360 Pulse article "Day Pitney Picks Up Another Chiesa Shahinian Corporate Pro."
The arrival of Corporate Partner Laurence Smith and the promotion of Stephen Catanzaro to Partner was featured in the New Jersey Law Journal's On The Move and After Hours column.
The news of Laurence Smith joining Day Pitney as a partner in the firm's Corporate practice was featured in Thomson Reuters' The Daily Docket Industry Moves column.
The arrival of Corporate Partner Elizabeth Yoo to the firm was featured in the Attorney At Law Magazine article "Day Pitney Further Expands Corporate Practice in New Jersey."
Day Pitney Press Release
The arrival of Corporate Partner Laurence Smith to the firm was featured in the Bloomberg Law article, "Day Pitney Recruits Partner to New Jersey Corporate Practice."
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