An inventor may want to attract investors (e.g., angel investor) to help with the finances of launching an invention. The inventor might just have an idea and nothing else. They may not have started the patent process, engineering, prototyping, or proof of concept and are really at the very beginning of the launching process. However, they may want the investor to share in the development costs. How does the inventor go about pitching the invention invention to the investor?
Dilemma between the investor and the inventor
The inventor needs to protect the invention so that an investor cannot steal the idea and launch the product themselves. Hence, the inventor wants to bind the investor with a nondisclosure agreement. However, the investor does not want to bind him or herself to a confidentiality agreement unless he or she is going to do the deal. The investor needs enough information to evaluate the deal. How can the inventor pitch the invention to the investor while stopping the investor from stealing the idea / invention from the inventor.
Four options for pitching the invention to investors
The four options for pitching the invention to investors are:
- After establishing patent pendency;
- Under a nondisclosure agreement;
- Both 1 and 2; or
- Neither 1 nor 2.
1. After establishing patent pendency
A safe way to pitch the invention to an investor so that the investor can evaluate the deal is to disclose the invention after establishing patent pendency of the invention. Patent pendency is established by filing either a provisional or nonprovisional patent application. The patent application should include detailed information about the invention. What are its benefits? How does it work? This information and much more should be included in the patent application.
By establishing patent pendency before disclosing the idea to an investor, any efforts by the investor to commercialize the invention or file their own patent application on the invention would be trumped by the investor’s first filed patent application.
The downside to establishing patent pendency first is the cost. Patent application cost can range between a few hundred dollars up to $10 000 to $20 000. If the patent application is being filed for the sole purpose of establishing patent pendency before pitching the invention to an investor then the upper range of the cost to file the patent application is not a worthwhile investment. If that investor declines to invest in the idea / invention, then the cost to file the patent application will have been wasted. If the patent application is also filed for other additional purposes, then it may be worthwhile spending the money to establish patent pendency.
At the lower end of the range, the patent application may be inadequate to protect the inventor. Patent applications at the lower end of the cost spectrum generally mean that the patent attorney had less time to prepare the patent application. Less time generally means that they may not have included all of the information that they should have included in the patent application. Patent protection afforded by establishing patent pendency is dependent upon the information that is included in the patent application. If the information does not fully describe the full scope of the invention then the lower cost patent application, and thus lower quality does not provide any type of patent protection for aspects of the invention that were not disclosed in the patent application.
Depending on the inventor’s financial means and the value of the invention, the inventor needs to decide for themselves if it is financially beneficial to spend the money to establish patent pendency for their idea.
2. Under a nondisclosure agreement
A nondisclosure agreement (or confidentiality agreement) is a contract that would prohibit the investor from disclosing or commercializing the invention on their own. The inventor could pitch the idea to the investor under a nondisclosure agreement. It would also prohibit the investor from using the information pitched to the investor for any other reason (e.g., benefits of patent protection) than to evaluate whether the investor would like to invest in the invention or product launch. The investor could be liable for breach of contract if they violate the terms of the nondisclosure agreement.
For the investor, the downside is that the nondisclosure agreement locks them in and prevents them engaging in businesses elsewhere that they might otherwise want to invest in. To mitigate this, there are often exceptions to the agreement to not disclose the information. Nondisclosure agreements often have an exception that the investor is not prohibited from investing in a similar business if the investor had previously received similar information from another inventor.
Even with this and other exceptions, many investors are reluctant to enter into nondisclosure agreements. Some online commentators have stated that “Real investors don’t sign NDAs.” I was an update author for Trade Secret Practice in California published by the Continuing Education of the Bar of California for a number of years. The standard recommendation to companies and investors was to have a standing negative nondisclosure. It is a notice that they would not keep any information confidential and that the inventor should establish patent pendency prior to pitching the invention to the investor or company. Patent pendency had to be established by the inventor before submission. It was better to require that inventors file a patent application on the invention and establish patent pendency before receiving any type of idea submission. This requirement limited the number of idea submissions but it would also limit liability to companies and investors for any potential breach of a nondisclosure agreement.
Not all investors are unwilling to enter into a nondisclosure agreement—it is worth at least asking to see if they would consider it. If they won’t, then the inventor would have to choose whether to spend the money to establish patent pendency, disclose the invention without any sort of protection, or to forego pitching the idea to that investor.
3. Both 1 and 2 (After establishing patent pendency and under a nondisclosure agreement)
This would be the best of both worlds—patent infringement and breach of contract. This would also be the safest way to disclose the idea to the investor. The inventor would have the patent application prepared and filed before disclosing the invention to the investor. The inventor would also ask the investor to enter into a nondisclosure agreement. If the investor says yes, then great. If not, then the inventor would have to decide whether to pitch the invention with patent pendency only, which in many circumstances would be acceptable.
4. Neither 1 nor 2
If patent pendency is not established and the investor does not want to enter into a nondisclosure agreement, then the inventor has to choose whether to disclose the idea / invention without any protection, or to forego pitching the invention to the investor.
The United States is a “relative novelty country.” This means that the United States allows its inventors to disclose and even commercialize an invention for one year, and they must establish patent pendency before that one year time period has expired. This is referred to as the “one year grace period.” If the patent application is not filed within the one year time period, the invention is dedicated to the public.
Unfortunately, the United States changed its patent laws in 2013 to be a “first-inventor-to-file” country. With this, the United States retained the one year grace period, but made it detrimental to rely on this grace period. The reason is that a third party (i.e., investor) could file their own patent application for an improved version of the invention within this period and be awarded the patent if they were the first to file.
There are actions and procedures that the inventor could take against the third party to remedy this situation. However, the costs and uncertainty of the outcome would, in my estimation, dissuade many inventors from pursuing those actions. Many would give up their idea.
Nevertheless, this is a valid option, and it occurs frequently, especially among family and friends. However, it is not the ideal situation.
I invite you to contact me with your patent questions (949) 716-8178. Please feel free to forward this article to your friends. As an Orange County Patent Attorney, I serve Orange County, Irvine, Los Angeles, San Diego and surrounding cities.