How do start-up founders protect their idea from being stolen by early employees/friends?

Founders leave companies before they are founded.

This happens in most companies and organizations. Let me give you some examples:

Apple: The original founders of Apple were Steve Jobs, Steve Wozniak and Ronald Wayne.

Ronald Wayne? His payoff as cofounder of Apple was a whopping $800.

The Beatles: Surely you enjoy the music of Stu, Pete, John, Paul, and George originally. Stu Sutcliffe became disinterested in music and Pete Best was fired and replaced by Ringo Starr. Stu passed away shortly after leaving. Pete didn’t make a nickel from being a member of The Beatles until 35 years after he left the band.

HarvardConnection: We all know the story from the movie, The Social Network, about how Mark Zuckerberg allegedly stole IP from the HarvardConnection team to start Facebook. The founders of the HarvardConnection netted millions based on the their settlement with Facebook.

I think we’ve pretty well established that founders leave companies.

And sometimes those founders steal intellectual property.

What can you do to protect yourself?

Here are eleven conventional and maybe unconventional ideas to protect yourself:

A. Have all Founders (and Future Employees) Sign a Proprietary Information And Inventions Agreement. The PIIA is a standard agreement that most employees sign when they join a new company. Have everyone, including yourself, sign one once they become part of the company. The PIIA is an insurance policy for you (and a reminder to your ex-employees) that ex-employees are legally bound to not steal information. You can find example PIIA’s on line.

B. Obey the Nine-Month Rule. Or maybe we should call it the three-month rule. All relationships go through phases. And your co-founder relationships will go through phases too. You will go through the honeymoon phase for the first three months or so. Don’t launch anything until you are through this phase. Months three through nine are where the conflicts arise and motivation wanes for some. So…

C. Talk Through the Key Issues Early. Make sure you and your co-founders are in basic agreement about the strategy, recruiting, and funding needs of the company. Remember…

D. Don’t assume conflicts will resolve themselves. Many won’t. In fact, the conflicts are likely to get worse. Talk things out and see if you can work together. Then…

E. Don’t try and stop a founder from quitting. This may seem harsh, but you are best off letting the founder leave. Why? The founder is likely to quit again. It’s painful to lose a key person so early, but you will survive it. And…

F. Remind the co-founder who is quitting they are privy to proprietary information. They will not like it, but it’s a not so subtle reminder that you are watching. That’s why it’s important to…

G. Make sure your equity agreements have stock vesting over a four year period, preferably with a one-year cliff. Let’s say you have two cofounders and each of you have 33% ownership of the company. Have a vesting agreement for the stock, so you haven’t just given 33% of the company to someone who has just left. And…

H. Get rid of your bad apples. Sometimes things don’t work out. It’s normal to have let a founder go. The other employees will be relieved that you took action. Just handle yourself with class and grace when you do. And…

I. Move fast. Okay, a cofounder quits and starts his own company with your stolen IP. Short term, there’s nothing you can do except move quickly to get yourself to market. In other words, you should be doing what you are already doing. One more thing…

J. Don’t bother suing because it’s a waste of time. It pisses you off that there is someone out there who stole your IP and is attempting to make money with it. I’ve been there, but suing is just a waste of energy and money because the other side typically has no money and no assets to go after. The best thing you can do is kick their ass in the market place. However…

K. Sue them if they succeed and you don’t. You have the PIIA agreement and a lot of evidence. And there is a lot more money at stake.

I know what you’re thinking: This sounds like a lot of extra work and possibly money.

Yes it is some extra work. You can find many of the agreements online. The one that I’ve seen burn people time after time is equity:

Equity (including your equity) needs to vest over time!

I am not a lawyer (even though I’ve been accused of being a rather good jailhouse lawyer), but I strongly suggest that you have some agreement stating that the new founder or employee’s equity will vest over a four-period. The first 25% will vest after one year, and the remainder will vest on a monthly basis over the next three years.

It doesn’t need to be complicated. Just remember that founders leave companies. And you need to be protected just in case one of your cofounder’s leaves.


Lakshminarayana Yeluri

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