One of the conundrums facing entrepreneurs seeking venture or high impact angel financing is when and what to disclose about the entrepreneur’s intellectual property.  Venture capital-worthy businesses often have some sort of “secret sauce” that is a critical part of the “unfair competitive advantage” that makes them so attractive to investors willing to take high risks in pursuit of lofty returns.  It stands to reason that at some point before an investor is willing to invest capital in an entrepreneur’s business the investor is going to have to know what the secret sauce is, if for no other reason than to get comfortable that it is sufficiently special and proprietary to support the entrepreneur’s business objectives.  Whether or not customers will buy a better mousetrap depends, foundationally, on whether you have a better mousetrap to sell them.

As critical as intellectual property due diligence is to prospective risk capital investors, entrepreneurs must be careful not to disclose the details of the secret sauce prematurely.  To cut to the chase, entrepreneurs should not disclose any confidential proprietary intellectual property information in the business plan prepared for prospective investors, or in the pitch deck/script prepared for initial meetings with potential investors.  Disclosures of confidential intellectual property information should occur only in due diligence and only pursuant to written confidentiality (e.g., a non-disclosure) agreements between the business and the prospective investor.  (Note that venture capital and most sophisticated angel investors will most assuredly not sign confidentiality agreements as a condition to receipt of a business plan or initial presentation.)

If the rule “no disclosure in initial investor communications; disclosure only in due diligence and pursuant to an appropriate confidentiality agreement” is pretty simple, understanding when the rule applies and how it manifests itself in particular situations requires a more nuanced analysis.  What information, for example, is really proprietary, and what constitutes disclosure of the same?

In terms of what information is really proprietary, think technical or business information that is not generally available to (or discoverable by) the public.  Obvious examples include information that would support a patent application (e.g., a unique device, process, algorithm, formula, etc.), or constitute a trade secret (such as the recipe for Coca-Cola®). 

Defining the full range of information that could be considered proprietary is beyond the scope of this blog.  Rather, the focus here is on what constitutes disclosure of the same.  The important point is that disclosure of a capability is generally not disclosure of proprietary information that needs to be kept secret and that can potentially be protected as intellectual property.  A simple assertion that a business can do something does not generally constitute disclosure of the important, disclosure-wise, secret.  The real secret (assuming you have one) is how you accomplish those ends, and that is what should not be disclosed without the appropriate protections in place.  In other words, without a signed confidentiality agreement, you should not disclose information that will allow “one skilled in the art” to make and use your invention without undue experimentation.

By way of example, suppose you have developed a process to make widgets faster, cheaper and better than the current industry standard, and that is the secret sauce that makes your business attractive to investors.  Disclosing that fact, and even the details of the same (how much faster, cheaper and better) is something you can disclose in your business plan and initial investor presentation, and will have to, if you are to interest anyone in investing in your business.  What you should not disclose, unless/until you have an appropriate confidentiality agreement in place (or a patent application on, in which case the issue is moot), are the proprietary details of how you accomplish those things.

A fair question, at this point, is why an investor would be interested in what you say you can do even if you have not told them how you do it.  The answer is that the rest of your plan and presentation is sufficiently strong, in terms of who you are and what you have to say, so as to make the prospective investor think that your claim is at least plausible.  The more extraordinary the claim, the more powerful the various supporting materials, particularly who you are, need to be.  You bolster the credibility of your conclusory claims with information that supports your own credibility.  For example, if your claim is that you can create energy from the vacuum of space, you had better have some pretty high profile scientists behind you if you want to your plan and initial pitch to be taken seriously.  (As an aside, I happen to think, as per Tesla, that energy from the vacuum is possible, but I would still be extraordinarily skeptical of anyone who claims they can exploit that energy today.)

While, as previously noted, a delineation of the kinds of information that could constitute proprietary information is beyond the scope of this blog, information about business models can be particularly problematic for many entrepreneurs.  While a controversial and evolving area of law, so-called “business methods” can in some cases be proprietary, and even patentable.  On the other hand, the vast majority of business models are not proprietary.  At the margins, the distinction is subtle and often contentious.  As a general matter, though, entrepreneurs tend to think new business ideas, for example a web site where folks could go to learn the real meaning of rap music lyrics (see my blog about Rap Genius) are, by virtue of their being new, protectable as proprietary information.  Just because an idea for a business like Rap Genius is new does not make it proprietary.  Having a new business idea is necessary, but sometimes not sufficient, to classify something as a proprietary piece of business intellectual property.