In our last post, we talked about whether or not it’s legal for an ex-cofounder to leave and start a competitor using your business idea. This time, we want to talk about big question #2: how can you prevent that?
- Make Sure Cofounders “Hand Over” Their Intellectual Property
This is perhaps the best way to prevent a future IP dispute with departing cofounders. When someone develops an idea, that idea by default belongs to the person that came up with it. So if you want the idea to belong to the company and its owners, in shares corresponding to ownership percentage, you need cofounders to formally hand over — the legal term is “assign” — those ideas to the company.
Talk to your lawyer about drafting an intellectual property assignment for all the cofounders to sign. (Hot tip: This is also something you’ll want to put in employment agreements and contracts with 1099 employees.)
- Mark Information as Confidential.
To qualify as legally protected confidential information in the eyes of the law, among other factors, the relevant information must be reasonably protected and shared in confidence. You can create a paper trail showing your business idea is confidential by marking email correspondence, memos, and other correspondence and related documentation as confidential. Remind cofounders in to be discrete about sharing the business idea unless the company is doing so as part of a mentor relationship or an investor pitch.
- Make Sure Cofounders Sign a Confidentiality Agreement
Having you and your cofounders sign a non-disclosure agreement, or NDA, is another way to provide some level of protection for your business ideas. These agreements bind the signers not to reveal the information subject to the agreement, and they’re enforceable so long as the signer is receiving something of value in return (such as equity). If a cofounder has signed an NDA and then leaves to start a company based on the same idea, you may have a breach of contract claim based on their violating the NDA.
- Have Realistic Expectations
Be aware that it’s very difficult to entirely prevent someone from taking your business idea. The measures we outline here provide some protection but never guarantee the outcome you want. And even if you’ve done everything right, it may not make financial sense to sue an ex-founder or their company. Courts will require a showing of damages — quantifiable losses related to the theft – and in the early days of a startup, those losses are hard to show. That said, taking the steps we describe here can discourage an ex-partner from stealing your ideas. After all, a lawsuit from your company would be difficult to explain to investors (and certainly won’t help attract more funding!).
In Part III, we’ll tackle this issue from another perspective. What if you’re the ex-founder, and you want to make sure you didn’t accidentally hand over your million-dollar idea?
