About this BlogJohn Lindsay is a registered patent attorney in Dallas providing patent, trademark, and other IP law service in invention, branding, content, and technology matters.
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Some companies simply copy and paste the terms of service and privacy policies. This can be a costly mistake. The terms of service (“TOS”) and privacy policies (“PP”) should reflect the combination of legal, business, marketing, and ethical concerns of the company. Facebook has received a lot of criticism of its privacy policies over the years, ranging from the tracking beacon to the more recent outcry over granting Facebook application developers access to its user’s telephone number and address information. Even though Facebook’s action were likely permissible within its TOS and PP, the public outcry lead to a reversal of its policy, highlighting the extra-legal importance of the documents. [Edit: Facebook has resumed the policy.]
Part of the lack of attention to the TOS and PP is that they are, in fact, legal documents… so the website developers’ eyes glaze over reading the legalese (snooze). But because they are legal documents that can bind the company and the website visitor, proper attention should be paid to the documents. In hurriedly copying the documents from elsewhere, a meaningful TOS and PP for an opinion blog, a product website, an adult services website, a B2B cloud service, a server penetration business, etc. may not be implemented. Each type of business has its unique legal issues that should be addressed. All the terms from one set of documents may not be intended, useful, and/or enforceable in different business use cases.
As a binding document, the TOS and PP can positively and negatively affect the direction of the business, including the monetization strategy. Facebook started with its users segmented in different silos, namely their schools. Originally, one needed a .edu email address in order to join and communication was generally limited to other people having emails with the same domain name. More recently, Facebook’s growth strategy is almost the opposite of that original strategy. It now encourages everyone to join and create relationships that did not previously exist. An inflexible TOS and PP may not have permitted that strategic change in direction.
Contrast that business scenario with the PP policy of the former eToys.com website. It read in part:
eToys respects your privacy. We do not sell, rent, loan or transfer any personal information regarding our customers or their kids to any unrelated third parties. Any information you give us about yourself or your kids is held with the utmost care and security and will not be used in ways to which you have not consented.
At a quick glance, that seems a respectable policy. However, the company went bankrupt. As the customer data was one of the valuable remaining assets in the bankruptcy estate, there was a dispute over the sale of the eToy.com customer list. In other words, the documents affected the ability of investors, creditors, and successors to recover value.
Again, it may seem counterintuitive that the TOS and PP dating can indicate the culture of a company, but podcast and technology guru Leo Laporte deactivated his Facebook account citing poor privacy control for a user account and stating that Facebook had incentive to not provide strong privacy (Note: he has since recreated a Facebook account). Yours truly only maintains test accounts on Facebook for similar reasons. In fact, Facebook’s privacy issues lead to startup Diaspora’s raising of ~ $200,000 based on creating a privacy oriented distributed social network. (Edit: And that little project called Google+)
A more pointed illustration of lack of ethics illustrated via the TOS and PP was shown in some now defunct dating websites. Those websites would send messages to male subscribers of the website that appeared to be from interested women. A few jilted men suspected that the messages weren’t from interested women and complained to the website operators suspecting that it was a ruse to entice them to sustain their subscriptions. The website “customer service” pointed those men to the terms of service, which stated that messages may be sent through the system from “likenesses” (read non-existent women) based on those men’s profiles and interests…. Those “unique” terms may be enforceable, but they are still ethically questionable. You can imagine that reputation of the company.
Frequently, in an intellectual property consultation with a startup team, we inventory and discuss the intellectual property involved in the business plan and the timing, cost, and strategy in protecting it. As some intellectual property rights can be impacted or misappropriated upon disclosure, the consultation turns towards upcoming disclosures of the proprietary elements of the business plan. Frequently, the upcoming disclosures includes presentations in front of angels or venture capitalists for funding. In turn, this leads to a discussion of approaches to protect elements of the business plan in light of the upcoming disclosure. Sometimes there is a discussion of nondisclosure agreements, which leads to the fact that the majority of formal investors don’t sign nondisclosure agreements. This can create a problem with the intellectual property rights associated with the business plan. For example, some elements of the business plan may be patentable subject matter. In certain settings, the pitch may be deemed a public disclosure. This would mean that the startup has one year to file a patent application in the United states and has forfeited patent rights in many countries outside the U.S., thus international patent filing protection is limited.
Below are three approaches for considering preservation of intellectual property rights associated with a business plan before pitching to investors:
Common concerns of a startup in disclosing proprietary without a signed NDA include the investor revealing the idea to others, theft of the business plan, and the risk of losing rights in the protectable elements of the business plan. A risk averse approach is to have the suitable intellectual property filings and procedures completed before making any pitches. Intellectual property submissions with a filing date prior to pitching is one of the better approaches to mitigate or minimize the damages associated with those concerns. One scenario where this approach may be useful is a Slanket style business plan. Where the business concept is centered around a product that has limited technological innovation, a catchie brand name, and a strong marketing campaign. The startup team may believe that pitching this without any intellectual property filings may be letting the cat out of the bag and opt for this approach.
A second approach is tiered disclosure of proprietary information. You are typically wasting paper and your breath in presenting a nondisclosure agreement to an investor on a first presentation. The first meeting is typically introductory and there is usually no need to reveal much proprietary information. You should be able to explain the product/service, the problem solved, the target market, financials, and the team credentials without discussing the secret sauce. The investors should then have sufficient information to determine whether they invest in the field of technology, whether they are already invested in a competitor, whether there is potential for return on investment, and whether there is interest in a further conversation. Then during the subsequent conversations, you may provide additional tiers of information. After the first or second presentation you may have a sufficient relationship for a nondisclosure agreement. Almost universally, by the time you are discussing term sheets (and clearly at due diligence) you will have NDAs and have revealed some or all of the proprietary information.
For example, a business plan may be centered around a system for generating and processing medical records using specially formulated inks, printers, and an imager adapted for rapid scanning and 100% accuracy in recognition and processing of the characters. In a first meeting, you might state that you have a system that enables the processing of a 100 bed hospital’s records in thirty minutes. In a later presentation, you might mention the novel ink, printer, and imager. In later presentations or due diligence, you would mention the composition, structure, and process. Be aware that not all investors are open to this approach – Angies’ Angels may be open to this approach while Victor’s Ventures may not. You should know what you are prepared to disclose before each presentation.
A third approach is to risk disclosure. To be sure, you are taking a risk. Investors openly state that they hear many pitches. They also openly state they converse and network with other investors. They also openly state that they provide mentorship to companies. The volume of information from the pitches and that open environment support a reasonable possibility of public or private disclosure of your proprietary information, even inadvertent disclosure. On the other hand, are you dealing with a reputable investor who wants to remain in the business? Are you dealing with someone who has a portfolio built upon others’ business plans? If so, why would they shoot themselves in the foot? Moreover, is the possible funding worth more than the risk of intellectual property disclosure or misappropriation? Could the first mover advantage from the funding outweigh the risk of disclosure?
The approach you choose should fit the intellectual property at issue, the business plan, the investors, and the risk tolerance of the team, among other factors. The above options should help you pitch while considering the preservation of your intellectual property rights.
Many small businesses need help with design and development of inventions at various stages. A startup may want a mockup or virtual prototype in order to pitch for funding. Later, the business may need a working prototype for further proof of concept. Then that prototype may need to be further refined for efficient manufacture. Thus a business may need expertise in moving forward from the concept stage to a tangible product. As I have stated before, be extremely cautious in using inventor assistance companies for these services. That being said, there are some governmental entities that are available for free or at reduced cost.
One great resource for the proof of concept, prototype assistance, and working through some of the early stage engineering issues is the Space Alliance Technology Outreach Program (SATOP). SATOP is an alliance of scientists, engineers, and other technical professionals who provide free technical assistance in machine design, process engineering, material selection, and numerous other technologies. Note: SATOP does not work on software or information technology projects. SATOP offers up to 40 hours of hours of free technical assistance, with a goal a providing a solution within three months. A small business submits a request for technical assistance and the program checks its subject matter expertise and availability before accepting the project. SATOP has centers in Florida, New Mexico, New York, and Texas.
There are other similar programs around the country, although their focus, cost, and scope of assistance may vary. Some programs provide only with the original prototype and others focus on specific industries.. Frequently, the programs are associated with a university or a Small Business Development Center. The University of Pittsburgh Manufacturing Assistance Center can assist with a wide range of issues from conception to the manufacturing process. It can help in creating 2D or 3D CAD models, machining, fabrication, and pilot production. The University of Maine College of Engineering also offers a program available to businesses, entrepreneurs, and researchers. The University of Utah will soon open the Energy Innovation Commercialization Center offering services in the clean and renewable energy.
Other than a search engine, great starting points for locating these program are your local Small Business Development Center counselors or counselors at the entrepreneurship or engineering department of your local university. The programs do not typically retain ownership of the intellectual property, thus you would maintain control of the patents and proprietary technology.