As much as the gospel is to the choir, the idea is to the entrepreneur. It is the idea which drives, creates and grows. The idea is the bedrock of the business and entrepreneurs are equally concerned
with making it a working reality as well as protecting it. Most of these ideas would remain on the drawing board in the absence of funding, and it is at this stage that entrepreneurs seek out venture
capital. Obtaining venture capital is a difficult task and it requires detailed and skilled information presentation on the business. When sharing all this information sweaty palms often crease business
plans as entrepreneurs juggle with terms such as patents, copyrights, trademarks, confidentiality clauses, non-disclosure agreements and privileged information. These legal terms understandably
sounds like Greek and most of these concepts can find reflection in latin maxims. Rather than taking a course in legal reasoning or Latin, this article informs an entrepreneur how to protect information
when sharing it with a VC without the legalese.
Holding Back when Pitching
Most entrepreneurs have detailed business plans in place before approaching a Venture Capitalist. To set up a meeting and elicit the VC’s interest usually a 2 to 3 page executive summary of the
business plan is prepared and dispatched. Both these documents contain vital information which has been the product of the entrepreneur’s knowledge, foresight and ideas. The nature of the
information which is contained in the business plan is incredibly sensitive as it includes a general review of the business, the financial forecasts, the funding needs and the expected valuation of the
company. In addition on meeting the VC, a presentation is made which outlines the business plan to walk the VC through the proposition. Now it is evident that, (a) the executive summary; (b) the
detailed business plan; and (c) the presentation will include highly sensitive information which if used to the detriment of the entrepreneur will have disastrous effects. Hence, the entrepreneur
is highly anxious to, obtain funding for the project and at the same time protect and to establish paternity over the information which is submitted to the VC.
Intellectual Property Rights as a non-starter
It would seem obvious and natural that one of the many statutory forms of Intellectual Property Rights would protect the essence of the business plans. However, none of the various forms of Intellectual Property protect the essence of the idea contained in the executive summary or the detailed information which is found in the business plan and the presentation. The law of trademarks only protects the name of the business or the product, whereas copyright also comes up short only protecting the expression of the idea and not the idea itself. Hence simply paraphrasing the business plan will evaporate the copyright protection.
Turning to the use of patents, the law of patents in India may provide limited protection if the business relies upon a device or invention which is patentable. However this protection will often not stretch to the idea and the business plan. The reason for this is that business method patents are not granted in India as they are in the United States. Hence, Intellectual Property Rights in this respect remains a complete non-starter. With the limitations which are present in Intellectual Property Rights one finds lawyers and entrepreneurs turn to contracts and agreements to create rights and obligations.
Having your cake while sharing it too
In the absence of any natural and automatic intellectual property rights attaching to business plans, the rights and obligations are created by a special form of contract termed as a confidentiality agreement. The confidentiality informs the VC that business plan is a confidential document and the VC agrees not to discuss or disclose the contents to a third-party.
Well drafted confidentiality agreements have various features, chief amongst them being the mode of acceptance. Since a contract becomes only enforceable on prior assent to the provisions of any agreement, it is important to signify the mode of acceptance. It is also important to make the mode of acceptance, non-onerous. This is important since, if the acceptance is mandated by traditional means, such as signing and returning a copy of the confidentiality agreement, it may end up in the dustbin rather than on the VC’s desk. VC’s are important and busy people, who receive several business plans without having time to go through each. Hence, a business plan accompanied by a confidentiality agreement requiring assent to be signified by signing and returning will seem onerous.
An easy and simple way is to model the assent by “deemed acceptance” as is done in most electronic contracts. Here “acceptance” is “deemed” to have been given if the VC proceeds beyond the first page and studies the business plan.
Other touchstones of a good confidentiality is asking the VC to destroy all copies of the business plan after perusal and use as well as to make it specific by putting a business plan number and date for each copy which goes out. If an entrepreneur is drafting the confidentiality agreement, they are further better off putting the confidentiality in simple and clear English and avoid lifting clauses from confidentiality littered over the internet. Sample confidentiality agreements are often wrong or contain legal language with a very different meaning than what ostensibly appears on a first reading.
Another reason why relying on sample agreements may result in difficulty is that these agreements have been drafted by lawyers from foreign jurisdictions after detailed negotiations and the clauses which are contained in them may not help in a local jurisdiction.
Strategizing the use of the Confidentiality Agreement
A measured legal protection is the best strategy to go about when seeking VC funding. Here the information disclosure and the confidentiality notice should be metered correspondingly. The first point of information disclosure is when the executive summary is sent. The executive summary should simply be labeled on its header and footer as “confidential and for [x] personal use only” (“x” being the VC). Here by inserting short succinct language an entrepreneur can avoid muddling the summary with legalese and devote more space to the business. When sending out the business plan, it is advisable to have a confidentiality and non-disclosure clause placed on the coverpage, however as outlined it should not mandate an onerous form of assent from the VC.
It is also important for the entrepreneur to consider whether the insertion of a confidentiality clause may decrease the chances of the business plan being read. This is a credible concern since VC’s review a large number of business ideas, many of which may be related and do not have time to consider potential litigation associated with business plans that are potentially related to one another.
Here if an entrepreneur is tempted to drop the confidentiality and non-disclosure clause, they can be some assurance in knowing that common law (law developed through cases decided earlier) provides for remedy even in the absence of any agreement. However, these are strategy calls which will needed to be taken keeping in view the specifics which vary from case to case. However, as a broad
general rule, it is advisable to have a confidentiality and non-disclosure clause to protect the core of the business, the idea. It is a truism that an idea is the most powerful force in the world (provided it
has legal protection).
[Guest article by Apar. He holds a master in law from Columbia Law School and is a partner at Accendo Law Partners where he regularly advises entrepreneurs, start-ups and SME’s. He also authors the popular
India Law and Technology Blog, www.iltb.apargupta.com where he writes on the legal regulation of emerging technologies. The TMT sector is one of Apar’s practice specializations and he has even authored a book on the Information Technology Act published by Lexis Nexis.]