trade s

Delaware Decision Highlights Dilemma for Startups to Protect Their Trade Secrets When They Seek Investment Financing

Counsel advising businesses must often deal with conflicting goals; that is especially true for startups.  Such business want to protect their intellectual property (including trade secrets) but still be able to disclose enough to attract investment capital. A recent Delaware decision highlights the tension in these goals.

 All businesses want to protect their intellectual property, including their trade secrets and other confidential information.  On the other hand, since intellectual property is often a startup’s chief asset, startups need to share their information with investors to convince them of the value of what they have developed.  The standard response is to use a non-disclosure agreement.  But those have their limits – investors often insist on flexibility to invest in other companies, including competitors.

 A recent Delaware Chancery case, Alarm.com Holding, Inc. v. ABS Capital Partners Inc. (2018), highlights this tension.  The court dismissed a trade secret complaint by a technology company against an investment company because the only basis for the claim of misappropriation of trade secrets was the move to the competing firm – which had been expressly agreed was allowed.

 

Counsel advising startups and drafting NDA’s need to be aware of this tension. Startups often lack the negotiation leverage to require more stringent terms in their NDA.  But at minimum they need to be aware of what non-disclosure agreements permit and whether they can tolerate the risk that such would create for their trade secrets.