Many people dream of coming up with a great, novel idea which would change the world, or at least some segment of it, and make the dreamer rich. The problem is, the person who comes up with the great idea often doesn’t have the wherewithal to put it into practice. So he wants financing to make his dream a reality, or he wants to sell his brilliant idea to somebody who is in a position to develop it and use it to make money. But how is the dreamer to retain control of the idea or make sure that he shares in the benefits of exploiting it? There are pitfalls looming no matter what approach he takes.
One approach is to seek financing or investment capital to develop, market and promote the great idea. Our dreamer soon discovers that commercial lenders don’t lend to thinly-capitalized start-ups, partners are hard to find and want an ownership percentage commensurate with their investment, and venture capitalists demand more control than our dreamer is willing to relinquish – after all, it’s his baby.
Many times, the most practical approach is for the dreamer to present his idea to a big company already in the relevant business, in hopes of selling the idea for a flat fee or a stream of future royalty payments, assuming the idea yields a profitable product or service. But our dreamer is worried that Big Company might expropriate his idea or design and use it as its own, without compensating him. This is a valid concern – there are many examples of companies having done exactly that, leaving the dreamer out in the cold. How can he protect himself?
There is no complete or absolute protection available. Unless the nature of the idea makes it possible for our dreamer to withhold some crucial element while still providing enough information to enable Big Company to evaluate the idea, his best bet is to have Big Company sign a non-disclosure agreement (NDA) before disclosing any information. There are many variations on the NDA, but the gist is that the person or entity to which confidential information is disclosed agrees to 1) not disclose the information to anyone else, and 2) not use the information for any purpose except the one for which it is being disclosed, i.e., evaluation of the idea’s usefulness and feasibility and the degree of the company’s interest in exploiting it, if any.
Unfortunately, an NDA, like most contracts, does not police and enforce itself. If Big Company signs one, evaluates our dreamer’s idea, turns it down and then goes forward on its own to exploit the idea successfully, our dreamer will have to take legal action to stop it and get his fair share of any profits. Stopping the unauthorized use might be as simple as sending Big Company a cease-and-desist letter, warning that if the unauthorized use doesn’t stop immediately, our dreamer will sue. Even if Big Company stops, this will usually not be enough to get financial compensation for the dreamer. That will probably require a costly lawsuit involving extensive documentation and the use of (expensive) financial, technical and other experts, depending on the nature of the idea. This is a daunting prospect for out dreamer who, unless he can find a lawyer to take the case on a contingent fee basis, will not be able to pay for such litigation.
Our dreamer should take a good, hard look at his idea and the relevant industry. In every industry, there are companies notorious in the trade for stealing ideas, designs, etc., regardless of their contractual obligations. Our dreamer would be well-advised to steer clear of those and try to present his idea to a company with a better reputation. After finding that company, he should disclose only what is absolutely necessary and, of course, get the company to sign an NDA containing maximum protections first. At the same time, he has to realize that no agreement is fool proof and no protection absolute or guaranteed.
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Non-Disclosure Agreements
Many people dream of coming up with a great, novel idea which would change the world, or at least some segment of it, and make the dreamer rich. The problem is, the person who comes up with the great idea often doesn’t have the wherewithal to put it into practice. So he wants financing to make his dream a reality, or he wants to sell his brilliant idea to somebody who is in a position to develop it and use it to make money. But how is the dreamer to retain control of the idea or make sure that he shares in the benefits of exploiting it? There are pitfalls looming no matter what approach he takes.
One approach is to seek financing or investment capital to develop, market and promote the great idea. Our dreamer soon discovers that commercial lenders don’t lend to thinly-capitalized start-ups, partners are hard to find and want an ownership percentage commensurate with their investment, and venture capitalists demand more control than our dreamer is willing to relinquish – after all, it’s his baby.
Many times, the most practical approach is for the dreamer to present his idea to a big company already in the relevant business, in hopes of selling the idea for a flat fee or a stream of future royalty payments, assuming the idea yields a profitable product or service. But our dreamer is worried that Big Company might expropriate his idea or design and use it as its own, without compensating him. This is a valid concern – there are many examples of companies having done exactly that, leaving the dreamer out in the cold. How can he protect himself?
There is no complete or absolute protection available. Unless the nature of the idea makes it possible for our dreamer to withhold some crucial element while still providing enough information to enable Big Company to evaluate the idea, his best bet is to have Big Company sign a non-disclosure agreement (NDA) before disclosing any information. There are many variations on the NDA, but the gist is that the person or entity to which confidential information is disclosed agrees to 1) not disclose the information to anyone else, and 2) not use the information for any purpose except the one for which it is being disclosed, i.e., evaluation of the idea’s usefulness and feasibility and the degree of the company’s interest in exploiting it, if any.
Unfortunately, an NDA, like most contracts, does not police and enforce itself. If Big Company signs one, evaluates our dreamer’s idea, turns it down and then goes forward on its own to exploit the idea successfully, our dreamer will have to take legal action to stop it and get his fair share of any profits. Stopping the unauthorized use might be as simple as sending Big Company a cease-and-desist letter, warning that if the unauthorized use doesn’t stop immediately, our dreamer will sue. Even if Big Company stops, this will usually not be enough to get financial compensation for the dreamer. That will probably require a costly lawsuit involving extensive documentation and the use of (expensive) financial, technical and other experts, depending on the nature of the idea. This is a daunting prospect for out dreamer who, unless he can find a lawyer to take the case on a contingent fee basis, will not be able to pay for such litigation.
Our dreamer should take a good, hard look at his idea and the relevant industry. In every industry, there are companies notorious in the trade for stealing ideas, designs, etc., regardless of their contractual obligations. Our dreamer would be well-advised to steer clear of those and try to present his idea to a company with a better reputation. After finding that company, he should disclose only what is absolutely necessary and, of course, get the company to sign an NDA containing maximum protections first. At the same time, he has to realize that no agreement is fool proof and no protection absolute or guaranteed.