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SMART ANSWERS
By Karen E. Klein
FEBRUARY 8, 2000


Can You Trust an Angel to Keep a Secret?

They rarely sign confidentiality agreements till a deal is struck, so know who you're dealing with before you talk

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Q:  How do you approach investors and still protect the confidentiality of your unique concept?  Many of them won't sign a confidentiality agreement, but I need to circulate my dot.com idea to as many potential investors as possible.
—M.L., Luna Pier, Mich.

A:  This is a big concern of entrepreneurs and inventors, and this column gets frequent queries on the subject. You are right: With few exceptions, you can't get venture capitalists, sophisticated angels, and providers of professional services, such as lawyers and accountants, to sign confidentiality agreements, particularly before they have a clear understanding of the nature of the technology and concept involved. Why? Investors have a large number of companies in their portfolios and new proposals all the time.They don't want to open themselves up to a lawsuit should they later back a competing venture. Lawyers and accountants are privy to the secrets of many clients. If you push too hard on the point at this early stage, the financier or professional will simply pass.

So, how's a startup with a unique idea to protect itself? If your idea is patentable, patent it. If it isn't, get over it, says Bill Reichert, co-founder of Garage.com, a Silicon Valley company that matches investors and startups and holds entrepreneur "boot camps" in the U.S. and abroad: "Entrepreneurs are all worried that somebody's going to steal their idea. Well, the truth is that somebody already has your idea, and your next one. Somebody is going to beat you to it before you get down the path yourself, and if your only advantage is having a unique idea, you're unlikely to be able to get a company up and running."

Other experts are less categorical. Joseph Stubbs, who heads the emerging growth and technology group of the Los Angeles law firm of Troop, Steuber, Pasich, Reddick & Tobey, says you may be able to assuage your concerns about secrecy without putting off investors if you hook their interest before you tell all. That may give you more leverage to request that they sign a confidentiality agreement later. Prepare an executive summary for initial review that does not contain proprietary information. "Once a threshold level of interest is established, and further discussions are contemplated, it may be appropriate to raise the issue of a confidentiality agreement," says Stubbs.

Stubbs says that with individual angel investors, it's not unusual to negotiate confidentiality obligations, when you strike a deal. The terms can be part of the investment documents or a separate document. VCs are somewhat more resistant, but there's generally nondisclosure language in VC deals as well. The fact is, once a VC joins your board, he or she has a fiduciary duty to the company to not use its information in ways that could hurt the company, Stubbs points out.

There are some unilateral steps you can take to establish that you expect a potential investor to treat your idea confidentially. Have a witness — preferably not a business partner or family member — when you present your concept, says Rod Berman, chair of the intellectual-property department for the Century City (Calif.) law firm of Jeffer, Mangels, Butler & Marmaro. Preface your presentation with the statement that you are disclosing the information in confidence. Then try to get the investor to acknowledge that confidentiality. "This may provide ammunition for the discloser to argue that there was an oral confidentiality agreement or that the recipient had a fiduciary duty of nondisclosure in the event the recipient disclosed without the discloser's permission," Berman says. You can follow up with a letter restating that you consider the information proprietary.

Of course, confidentiality agreements contain exceptions, and they won't protect you from crooks, says Berman. The best protection is to do business with reputable people only.


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