How do you make sure Angel Investors don't "steal" your idea

This may be a silly question,

But when someone solicits an angel investor to help fund a tech company in the very early stages of development (little more than an idea, framework, and plans), then how can those entrepreneurs protect their ideas?

Is it common/possible to "patent" your idea? And/or Make a record of your meeting to prevent IP theft?

Comments (13)

 
Sep 9, 2011 - 5:34pm

Lol @ nda. (A lot of vc's don't do nda's).

I think a bigger thing to worry about is being screwed over in the pre contract negotiations over equity positions, bond yields or just in terms of the help youll get from the guy. I was hosting a call w/ an angel investor who was looking for funding for one of the companies hed invested in. They were also currently in negotiations with another firm to get another series of funding, and we would have been down the line a bit. Long story short, the associate I was working with asked whether this would be a problem in terms of dilution of the stock when we would be getting in, and the angel was just like "well we haven't signed a contract with (xyz firm) yet, so we could swing it so that you get a better deal out of it than they realize. He was referring to giving them non-preferred shares and just diluting the hell out of it.

There are a lot of shady angels out there, and really, theres little you can do to make sure they dont steal your ideas. Biggest problem is that they only have so much time and generally not the skill to actually execute on shit, hence their investing in many things at once. If it isnt some really specific thing, youre not gonna be able to patent it, and if you did, itd have to be a good patent and youd have to have enough so you could fight the other in court if it came to it.

Just look for a well known, honest angel. Thats all that can be done. Or just dont go to an angel, save your own money up and go to a VC with something that is in proof of concept or revenue stages.

“...all truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident.” - Schopenhauer
 
Sep 9, 2011 - 8:51pm

seabird:
Lol @ nda. (A lot of vc's don't do nda's).

I think a bigger thing to worry about is being screwed over in the pre contract negotiations over equity positions, bond yields or just in terms of the help youll get from the guy. I was hosting a call w/ an angel investor who was looking for funding for one of the companies hed invested in. They were also currently in negotiations with another firm to get another series of funding, and we would have been down the line a bit. Long story short, the associate I was working with asked whether this would be a problem in terms of dilution of the stock when we would be getting in, and the angel was just like "well we haven't signed a contract with (xyz firm) yet, so we could swing it so that you get a better deal out of it than they realize. He was referring to giving them non-preferred shares and just diluting the hell out of it.

There are a lot of shady angels out there, and really, theres little you can do to make sure they dont steal your ideas. Biggest problem is that they only have so much time and generally not the skill to actually execute on shit, hence their investing in many things at once. If it isnt some really specific thing, youre not gonna be able to patent it, and if you did, itd have to be a good patent and youd have to have enough so you could fight the other in court if it came to it.

Just look for a well known, honest angel. Thats all that can be done. Or just dont go to an angel, save your own money up and go to a VC with something that is in proof of concept or revenue stages.

Your job sounds cool...

Under my tutelage, you will grow from boys to men. From men into gladiators. And from gladiators into SWANSONS.
 
Sep 9, 2011 - 5:40pm

There is no way you can protect yourself. You have to take risks.

It is not possible to patent an idea.
http://www.uspto.gov/patents/resources/general_info_concerning_patents…

Angel investors or VCs will not sign any confidentiality agreements. I interned for a large Angel Fund where I had to sit on diligence/screening meetings, and they always turned those kinds of offers down. Here is the reason:
http://startuplawyer.com/venture-capital/why-a-vc-will-take-a-lighter-t…

Moreover, most angels won't even consider investing if you don't have some kind of IP already in place (provisional patent should be fine).

 
Sep 9, 2011 - 8:16pm

Because it wouldn't make sense for the VC. Why steal a business model when you can can fund it and make more money than the entrepreneur.

For example, even though Mark Zuckerberg founded Facebook, Peter Thiel will make more money from it because he funded it. Why would he bother stealing Zuckeberg's idea. If he did, he would have to hire a guy like Zuckerberg to run the business. So it makes more sense to just fund Zuckerberg since he probably would be the most passionate and knowledgeable person to successfully launch and grow Facebook's concept.

The VC and angel investing community is very small. Word gets around when VC's do shady shit, so they don't want develop a bad reputation among the entrepreneurial community. Also, a lot of VC's (like Thiel) were once entrepreneurs themselves.

Man made money, money never made the man
  • 1
 
Sep 9, 2011 - 8:21pm

The NDA and confidentially agreement are crap. If u think it will protect ur product, u r idiot.

Why not work a few yrs in ib, quit ib, then finance using ur own money, then pitch to a VC once u r ready, skip the angel altogether. An angel will provide less working capital to you relative to a VC. And an angel is more questionable in terms of integrity. VC is a company where partners, and the employees are predispositioned to follow standard company policy and not 'steal', do as much shady crap behind the scenes as a lone wolf without any oversight.

The only reason I'm even in this ib forum 'looking/asking around for an ib job' is cause I need to hit my tech startup with $100,000+ cash in order to cover the apartment rent and food rather than fancy equipment, buildings, ETC, . The cost of capital for tech programming startup is very low.

 
Sep 11, 2011 - 12:10am

God of Wine:
I wouldn't take a lot of this advice seriously. Go for CAs or NDAs. The group I'm an adjunct analyst in always signs them. Write down when you communicate with VCs, etc. and what was discussed. Send me a PM if you want to talk specifics.

I wouldn't take GOW's advice seriously. He makes no differentiation between late stage and early stage funding, or vc's having nda's w/ firms that have serious investment and a patent in action for something like biopharma, that would actually make the legal expenses involved in any potential legal matters involving the nda relevant. Keep in mind that a lot of VC firms dont necessarily invest only in companies that are starting up - they also invest in spinoffs or new products from/for existing large companies - this would be when an NDA would be appropriate, and given that you are proposing an early stage project, this would not be appropriate. For reference, the firm Ive been working with does growth equity and VC.

“...all truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident.” - Schopenhauer
 
Sep 10, 2011 - 7:36pm

A VC or Angel isn't investing in just an idea. They are also investing in a team. They are probably pitched great ideas all the time but don't like the team. Great ideas are a dime a dozen, remember when Edison said "Success is 1% inspiration, 99% perspiration." In other words, execution is a lot more important than a great idea. I'm sure anyone who has got a meeting with a VC thought they had a great idea, yet only 10% will get funding. Its not just that idea's aren't good; its that the team behind it might not be right to execute on that idea.

Even so, what difference does it make. Being second to market isn't the worst thing in the world. Facebook and Google were both second to market; they simply refined an idea and made a better product.

Even so, the venture model is built on the assumption that a VC or Angel won't steal your idea because if they did, that would significantly damage their reputation, and would end deal flow for their fund.

looking for that pick-me-up to power through an all-nighter?
  • 1
 
Sep 11, 2011 - 2:00am

^^^ Agree with seabird.

P.S. And here is the scenario where angels MIGHT take advantage of the entrepreneur...

You show up and present about something another company they invested in already does. Then they: a) won't invest, because they already have a company with similar idea, b) could use the information from your presentation/business plan to help their pet company compete with you.

This is not very likely to happen because the deal flow depends on the reputation, and most probably they'll cut you out in pre-screening to avoid the conflict of interest. However, I would not exclude the possibility either, especially when it comes to lone wolf angels that do not belong to an angel group/fund.

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