Entrepreneurs often struggle with what they should and should not say to potential investors, especially given that investors often will refuse to sign a non-disclosure agreement (“N.D visit our website.A.”). Disclose too little information about your start-up or idea and you may fail to interest an investor. By the same token, disclose too much and you may expose yourself to an unacceptable level of risk.

Eileen Zimmerman wrote a fantastic article explaining why more start-ups are sharing ideas without legal protection, quoting OlenderFeldman’s Aaron Messing. While we highly recommend reading the whole article, we wanted to expand a bit on some of the topics Aaron spoke about in the article:

Even if a start-up manages to get a[ non-disclosure] agreement signed, it can be tough to enforce, said Aaron I. Messing, a lawyer with OlenderFeldman LLP in Summit, N.J. “It’s very hard to prove that you kept information confidential, and it was only disclosed under an N.D.A.,” said Mr. Messing, who represents both founders and investors. “And it can be expensive.”

One of the reasons why the N.D.A. disappeared in the context of start-up institutional capital is because an N.D.A. is only as valuable as a party’s willingness to enforce it. While it is true that institutional investors do not want to be bothered with keeping track of N.D.A.’s, its also equally true that most entrepreneurs are unwilling or unable to enforce a confidentiality agreement. In addition to the expense of litigation and difficulty of proving that the information was kept confidential, very few entrepreneurs want to be known as someone who sues institutional investors.

Companies will need to disclose significant proprietary information about themselves to get to the point where an investor will want to sign a term sheet, but that level of information will generally be insufficient to enable someone else to duplicate. However, if a company’s market or product has a low barrier to entry, proprietary information doesn’t matter as much as execution. Where there is a a barrier to entry regarding certain forms of technology or an invention, an N.D.A generally will be signed in connection with due diligence process, where the level of disclosure that is beyond what would ordinarily need be disclosed in order to explain what a company does.

One of the little known secrets about start-ups and investing is that, according to reputable studies, under 3% of early-stage start-ups receive investment from professional or institutional capital. The equation is simple: there are simply more ideas than good ideas, more good ideas than good businesses, and more good businesses than good investments. That equation also helps explain why investors

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often will refuse to sign an N.D.A. Given the likelihood that your start-up will not receive professional investment, when pitching to institutional capital, great care should be taken to vet the investors and determine what specifics are appropriate to be disclosed.

Mr. Messing advised making sure an investor did not have potential conflicts or overlapping investments. Reputable investors, he said, “have much to lose by stealing your idea.”

It is true that if an investor is in the business of stealing ideas, that investor is not going to be in business for very long. However, even the fact that you are pitching to reputable investors doesn’t mean that they will not disclose information they’ve learned from you to someone else, whether intentionally or (more likely) unintentionally, as individuals often simply forget the context under which they originally heard information. This is why it is exceptionally important to share information appropriately, that is, disclosing sufficient information to convey what is unique and proprietary about the start-up, without disclosing such a level of information that would allow someone to replicate the idea. In short, entrepreneurs should attempt to maintain the barrier to entry, to the extent possible. In any event, when vetting a potential investor, referrals and word of mouth will often be the best indicators, as quality investors pay great attention to making sure they have referenceable contacts. Once a start-up has identified a suitable investor, they should typically reveal details over time so that they do not say too much too early. Start with a teaser, and work your way towards an elevator pitch, followed if appropriate by an executive summary, a pitch deck and business plan.

When discussing a start-up, founders should walk a fine line, conveying sufficient information about what is unique and proprietary, but not disclosing information that would let someone replicate the business. For example, said Mr. Messing, an entrepreneur could disclose “what an algorithm can do, but not the algorithm itself.”

An entrepreneur that develops unique technology must find a way to keep that technology proprietary. In order to do so, the entrepreneur needs to understand the difference between patentable subject matter, trade secrets (e.g., the Coca-Cola formula) and things that are otherwise unprotectable but that have special marketing angles or specific go-to-market strategies that may give the start-up a unique first mover advantage. This is where it is most important for entrepreneurs to have qualified counsel, so that they know what type of intellectual property they have. It is rare that an entrepreneur will know what type of intellectual property they have, and understand what they can and cannot expose. We routinely advise our start-ups on how to compartmentalize intellectual property so they understand what is protectable and what is not, and to the extent the intellectual property is protectable, the best ways to do so.

Of course, an N.D.A. takes on more importance in the due diligence/term sheet context, prior to consummating an investment, where a company will often need to disclose significant proprietary information in a level of disclosure that is beyond what would ordinarily be disclosed to simply discuss what the company does. OlenderFeldman generally does not recommend entering into the due diligence process without an N.D.A., and has yet to hear of any situations where an institutional investor breached an N.D.A. in connection with a transaction (and certainly none that the Firm has dealt with).

New Jersey Law Requires Photocopiers and Scanners To Be Erased Because Of Privacy Concerns

New Jersey Law Requires Photocopiers and Scanners To Be Erased Because Of Privacy ConcernsNJ Assembly Bill A-1238 requires the destruction of records stored on digital copy machines under certain circumstances in order to prevent identity theft

By Alice Cheng

Last week, the New Jersey Assembly passed Bill-A1238 in an attempt to prevent identity theft. This bill requires that information stored on photocopy machines and scanners to be destroyed before devices change hands (e.g., when resold or returned at the end of a lease agreement).

Under the bill, owners of such devices are responsible for the destruction, or arranging for the destruction, of all records stored on the machines. Most consumers are not aware that digital photocopy machines and scanners store and retain copies of documents that have been printed, scanned, faxed, and emailed on their hard drives. That is, when a document is photocopied, the copier’s hard drive often keeps an image of that document. Thus, anyone with possession of the photocopier (i.e., when it is sold or returned) can obtain copies of all documents that were copied or scanned on the machine. This compilation of documents and potentially sensitive information poses serious threats of identity theft.

Any willful or knowing violation of the bill’s provisions may result in a fine of up to $2,500 for the first offense and $5,000 for subsequent offenses. Identity theft victims may also bring legal action against offenders.

In order for businesses to avoid facing these consequences, they should be mindful of the type of information stored, and to ensure that any data is erased before reselling or returning such devices. Of course, business owners should be especially mindful, as digital copy machines  may also contain trade secrets and other sensitive business information as well.

New Jersey Trade Secrets Act

By Christian Jensen

New Jersey Trade Secrets Act

On January 9, 2012, New Jersey Governor Chris Christie signed into law the New Jersey Trade Secrets Act (NJTSA). The NJTSA codifies many court decisions that provide certain rights and remedies in the event that a trade secret – such as a formula, design, prototype or invention – is misappropriated. The NJTSA provides New Jersey businesses with a statutory vehicle to use in the event of either actual or threatened misappropriation of trade secrets.

The NJTSA is modeled after the Uniform Trade Secret Act (USTA), making New Jersey the 47th state (plus the District of Columbia) to enact a version of the USTA and leaving just Massachusetts, New York and Texas as the only non-UTSA states. Notably, the definitions of “trade secret” and “misappropriation” under the NJTSA are broader than under the UTSA, thus providing more protection to businesses. Further, while the UTSA provides that, as a general rule, it “displaces other law which provides civil remedies for misappropriation of a trade secret,” the NJTSA specifically states that “the rights, remedies and prohibitions provided under this act are in addition to and cumulative of any other right, remedy or prohibition provided under the common law or statutory law of this State.”

An action for misappropriation must be brought under the NJTSA within three (3) years after the misappropriation is discovered, or, with reasonable diligence, should have been discovered. It is not a defense to the NJTSA to argue that proper means to acquire the trade secret existed at the time of the misappropriation.

The remedies available under the NJTSA to the holder of a trade secret include:

  1. Damages for both the actual loss suffered by the plaintiff and for any unjust enrichment of the defendant caused by the misappropriation. Damages may also include the imposition of a reasonable royalty for unauthorized disclosure or use.
  2. Injunctive relief for actual or threatened misappropriation of a trade secret. Under certain exceptional circumstances, an injunction may condition future use upon payment of a reasonable royalty.
  3. In cases involving the willful and malicious misappropriation of a trade secret, punitive damages may be awarded in an amount not exceeding twice that awarded for actual damages and unjust enrichment.
  4. An award of attorney’s fees and/or “reasonable” expert fees if: (i) willful and malicious misappropriation exists; (ii) a claim of misappropriation is made in bad faith; or (iii) a motion to terminate an injunction is made or resisted in bad faith.

It remains to be seen how the passage of the NJTSA will affect business competition in New Jersey, but the enhanced protections offered by the Act and the availability of attorney’s fees, expert fees and punitive damages will hopefully deter frivolous litigation and the theft of trade secrets.