Term Sheet 101: The Proprietary and Inventions Agreement - Tips to Know
Look at any venture capital agreement, big or small, and it’s guaranteed that you’re going to see a clause for a proprietary and inventions agreement. These clauses protect not just the interests of the investor at the time of investment, but also with what is created from that investment interest. In simplicity’s sake, one would argue the investor is already getting rewarded with an agreed-upon return financially. However, life and the VC reality is that the investor needs to also protect his or her stake in the future of the company, because those ideas created with germination can be worth far more than just a simple financial return.
So here are five common examples that should probably be in every agreement worth its salt (and if not it should be amended in before the ink settles on the agreement signature block):
- Bind all the officers, not just the company. A good PI&I clause will mention and specify all current and former officers, employees, and contracted consultants of the company and bind them into a non-disclosure type lock or similar restrictive bind so that proprietary assets don’t walk away as soon as they are discovered. This type of clause clearly defines who owns the proprietary information, and that’s frequently in the investor’s interest when included because it forces the company to also protect the asset when stolen as well (sometimes they aren’t interested to chase an issue).
- Ensure the company’s future. The lifeblood of a startup is often its new product idea or service. And when it is extremely unique, the product or idea needs to be protected proactively. If a clause is in place to do just that, the company’s near-term and longer-term future can be ensured versus being lost by one of the star employees deciding to start his own company or another business stealing the product or service for their own.
- Any product or service ownership change needs to be discussed. There’s a lot of business that occurs daily in a company that an investor will not know about, nor does he or she need to. Getting into the weeds of the company causes all sorts of problems from conflicts in direction or leadership identification and morale problems with employees and staff.
- Cover anything and everything; don’t get picky. A good PI&I clause is all-inclusive, not selective. You want to make sure an agreement has the ability to anticipate and protect all trade secrets, non-disclosure agreements, joint development agreements, R&D yet to happen, licensing, proprietary notes and ideas, intellectual asset training and especially new prototypes yet to be patented, copyrighted or trademarked.
- Define the partner players early. Some of the best collaborations occur between companies who make their inventor employees partners in the inventions and new ideas that the startup creates. There is no stealing of the idea; it’s a partnership sharing of the success. A sheet term that recognizes this long-term benefit removes the ambiguity early, resolving what can end up being a very nasty legal mess with the inventor-employee, company, and investor.
The number one reason proprietary information and trade secrets end up getting lost in the scuffle of a startup, or tangled in legalities is due to a lack of clarity from the beginning and no sign of the inventions agreement in the term sheet. The term sheets can do an amazing job and avoiding these problems very early on, from existing assets to new ones yet to come. But a venture capital agreement has to be designed to provide this future planning with careful crafting. It doesn’t happen by default or accident. And an investor needs to insist on this kind of clause if it's not present or obvious. Sometimes how VC works can very well be the investor thinking about what is needed for long-term survival of the company before the company founder does. This is one of those cases.