Whose IP is it anyway?
Allow me to paint a picture for you.
You’re a startup founder with an interesting business idea. Like a lot of new ventures, you require some outside funding to develop a proof of concept or, better yet, a commercial product from your solution. You dedicate countless hours to making the perfect pitch deck, send it to countless investors, and use it for endless applications to accelerator programs. You get through the early review stages with some of these potential investors. Maybe you even get a term sheet or some funding, or you are rejected at every turn. But then, you find one of these investors has invested in a company that is “using your idea.”
You’re angry. You speak to lawyers, but their opinions aren’t satisfactory. You feel powerless. What else can you do? You take your phone, log in to a popular website and eloquently vent your anger in a series of posts that trend (you are not the only one who feels this way) due to the feelings of injustice that your predicament has elicited.
The above scenario describes what is an increasingly common phenomenon in startup ecosystems from Nairobi to Lagos to Silicon Valley. The allegations made by the founder of Nigerian startup Sidebrief against Future Africa in 2021 is one recent example of the different considerations founders and investors need to make about intellectual property (IP).
For founders, claims like these have made them consider and understand where the real value lies in their business ventures and how best they can protect that value. For investors, it has incentivised them to ensure that founders and the wider ecosystem are better educated on all things IP in order to protect their goodwill in an age of social media-driven brand risk. Name and reputation matter as much as returns and exits in startup investing. Given how intra and inter-connected startup ecosystems are across Africa and worldwide, it’s not difficult to see why this is the case. Additionally, an investor or accelerator’s deal (sourcing) flow is strongly correlated with, or some may argue is a function of, its reputation among the founder community and fellow investors.
This is the context in which Founders Factory Africa, where I work as Head of Legal, has been developing a strategy to engage with the African startup community on these questions. These questions include:
- What is IP?
- Is my pitch deck IP?
- Will an investor sign my non-disclosure agreement (NDA) before I pitch my business?
- Can my investors invest in a competing business with mine?
- Can an accelerator that rejects my venture application/pitch deck incubate or invest in a competing business?
These, and similar questions, are important for the ecosystem to collectively address as the discourse around IP gains traction. So, let’s go through some of these questions and briefly discuss the legal positions and business best practices related to each other within the context of IP.
What is IP?
IP refers to legally recognised assets created from ideas. However, ideas in and of themselves are NOT legally recognised or enforceable assets. Ideas must be acted on to gain legal protection. Depending on the idea and the way it’s acted on, these legal protections can be copyrights, trademarks, patents, and such. They could also be trade or business secrets. Trade or business secrets consist of uncommon information that a business generates/has/uses that drives its success.
While copyrights, trademarks, patents, etc., are rights protected under the statutes of various countries, trade secrets are protected through contracts (e.g., NDAs). Having set this context, the question then evolves to whether a pitch deck is IP.
Is My Pitch Deck IP?
The legal answer, in short, is yes because a pitch deck, like any document, is a “literary work” within the context of copyright law in most countries. Copyright simply refers to a bundle of exclusive rights to use a particular work, and which are automatically created once the work comes into existence. These rights generally revolve around using a work for commercial purposes or gain. The work’s author is regarded as the first owner of these bundled rights under most copyright laws — unless there is an agreement stating otherwise. This means, generally speaking, the author of a pitch deck owns the copyright to that pitch deck. Consequently, for anybody else to copy or otherwise use it for commercial gain, they must first get permission (i.e., a licence) from the author to do so.
Will an Investor Sign My NDA?
Knowing what we know now (a pitch deck is a form of IP — specifically, copyright), what does this mean for a business idea or solution described in a pitch deck? Do these ideas or solutions also constitute IP?
The answer is no.
A business idea in and of itself is generally not recognised as a legally enforceable asset. Sure, it is possible to try and protect a business idea via NDAs and confidentiality agreements but based on what I’ve seen within the ecosystem and the conversations I’ve had with investors (potential and otherwise), investors generally do not sign NDAs. The average VC receives hundreds, if not thousands, of pitch decks annually. NDAs cannot prevent other founders and entrepreneurs from having the same idea and commercially acting on it anyway. Any attempt to do so would likely meet a swift legal end, regardless of jurisdiction.
Think about it. If others could be stopped from acting on a business idea because someone already had/started it, that would effectively mean that there could be no market competition. Once a venture is established to solve a particular business problem or provide a particular business solution, no other business would be entitled to do the same without getting permission from the founders of the first business (given that they had the idea first). But then, what happens if two or more businesses contest who had the original idea? What constitutes the “original idea”? The rabbit hole can be endless.
The best way for founders to protect their business ideas is to execute them better than anybody else can/will and to protect the internal business knowledge and information that gives them the competitive advantage to do so. This is the belief of most investors a founder will come across, and hence why most investors do not sign NDAs before reading or hearing a pitch from a founder.
It’s expected that a founder should be able to describe their venture in a succinct and general manner that would entice an investor to want to dig deeper. Digging deeper is usually in the form of due diligence, which an investor only typically conducts after a term sheet (that usually contains mutual confidentiality provisions) has been signed. From what I’ve experienced, a founder that cannot adequately pitch their venture (without having to divulge commercially sensitive IP or information) will usually struggle to get past initial discussions with most investors.
Can My Investors Invest In a Competing Business to Mine?
Generally, given that a person cannot legally stop someone else from starting a competing business to theirs, by extension, it is also broadly not legally possible to prevent an investor from investing in competing businesses. However, this is where industry practice — in order for investors to protect their goodwill and brand — very much comes into play.
As mentioned earlier, an investor’s deal flow is somewhat linked to their reputation among founders and the investor community at large within a particular region’s startup ecosystem. If an investor has an undesirable reputation with these stakeholders — as a creator/abuser of conflicts of interest situations with its portfolio companies — word would quickly spread, and founders would not want to work with such an investor. If an investor is blacklisted in the founder community, other investors (particularly lead investors) will not invite these types of investors to co-participate in rounds for fear of poisoning the deal for founders.
It’s for these reasons that it is extremely uncommon for investors to invest in competing businesses or have competing businesses in their portfolios. In the rare situations that they do, best practice involves extensively discussing and working out modalities (such as internal ethical walls or restricted information rights) to give the founders comfort.
Yet, what “competing businesses” mean in this context is also an important question. For example, would it apply to businesses in the same sector, or only those in the same sector and geographical territory? If the latter, would a startup aiming to service a global market affect the definition? These are some of the considerations that would determine what would be required in such instances as they happen.
Additionally, investors in early-stage startups often invest in the founder more than (or at least as much as) the business idea/venture. Accordingly, there are numerous instances where an investor may agree that the business idea is potentially viable, but only with a different founder. This could be because the investor feels the current founder does not have sufficient experience or lacks certain key skillsets, or simply concerned about the founder’s personality or history. But, this notwithstanding, it is very rare for an investor to invest in two companies in the same line of business in the same territory — particularly where such investor is a board member of, or has other means of access to, sensitive commercial information about both companies.
To underscore this point, in developed startup ecosystems such as Silicon Valley, it is a known practice for startups to target investors for funding (even where they may not need said funding) so that competitor startups are unable to secure investment from the targeted investor/s) — due to this practice.
Quality Ideas Are Just The Beginning
In conclusion, ideas are their own currency within the startup ecosystem. And, if founder develops valuable IP or trade secrets while executing their business idea, they can and must protect these assets to maintain whatever competitive advantage those assets convey.
Yet, if my career within the startup ecosystem has taught me anything, what ultimately matters is how a founder executes their business idea, not the idea or ideas themselves. Ideas are the start-line. The race is execution.
