Here’s an ugly side of having a strategic investor on board, which we would like to believe is perhaps just a random, one-off case.
A strategic investor and a board member hears to the whole plan and then executes and pushes the product in the same market, 15 days immediately after the launch by the startup. It is exactly same product that was discussed in the Board meeting. It took a very short time for the large team of the investor to actually work on the product and launch.
Investment agreements have covenants, mostly for the founders. While investors have the flexibility of selling the shares or invest in a competitor, the clause on “Confidentiality”, details that all the parties to the agreement will keep the company’s information confidential. If the product is launched and is in the market, then the information is in public domain and can be copied? Should then, the agreement have a clause on non-compete for strategic investor?
If the strategic investment is for the purposes of making the investment work, then obviously the thinking is that, it is one team? If the startup is not working at speed, then perhaps there is support rather than copy and launch? If the investor was infact working on the product idea, then should have stepped out of the board meeting due to conflict?
Proving and enforcing confidentiality agreements are difficult. In India, unlike USA or other countries, there is no specific legislation to protect trade secrets. (The proposed National Innovation Act, 2008 is still work-in-progress) USA has a model legislation called Uniform Trade Secrets Act (USTA) and about 40 States have enacted various statutes modelled after USTA. You may want to read our earlier post on this here.
While we wait for specialized courts to deal with innovation, we trust alternative methods of dispute resolution might be an answer. You can catch the three part series on mediation and arbitration here, here and here.
The questions, however, still remain. Do let us know of your suggestions.