For his latest article, our expert contributor and Grid Law founder David Walker provides readers with a legal handbook for protecting a new business idea.
Clients often come to me with an idea for a new business and the first thing they want to know is how to protect it. Their biggest concern is preventing a rival business from stealing the idea and getting it to market before them.
This can be an emotional subject because often the idea is close to their hearts and very personal. It’s also a sensitive subject because it seems everyone has a horror story about someone they know who has had a new business idea stolen and lost a huge amount of money as a result.
When it comes to protecting an idea for a new business, entrepreneurs often believe anecdotal evidence more than the real facts. So, in this article, I want to look at this issue in three stages.
First, I will explain how best to protect the idea. Then we will look at protecting the different elements of the business and finally I’ll explain how to protect the value of the business you have created.
When you have an idea for a new business, you must understand what the business is, and what’s new about it. Let’s use an app as an example because many of the new business ideas I see include an idea for an app.
Despite protests from the client to the contrary, the business is not the app. The business (in general terms) is how you attract new customers, how you solve their problems and how you make a profit doing so. The app is just one of the ways in which you can provide a solution to the customers’ problems.
You need to break down the big idea into all of its different elements to determine whether or not they are new, and whether there’s anything about them which needs to be kept confidential.
You may find that on their own, none of the ideas are new. Instead, it may be the unique way in which you bring them together which forms the basis of your business.
The more innovative the idea, the riskier it will be. So, before launching the business, or even committing resources to developing it, you may want to test it and discuss it with potential customers to prove the concept works.
How can you do this and protect the idea at the same time?
At this stage, intellectual property isn’t the answer because intellectual property doesn’t protect ideas. It only protects the expression of ideas.
For example, copyright doesn’t protect an idea for a new book, the book is protected by copyright laws once it has been written. Trademarks don’t protect an idea for a new brand, they protect the brand once it has been created.
The only real way to protect an idea is to keep it a secret.
The trouble is, testing an idea and keeping it a secret at the same time can be problematic, so you need to approach this in stages.
If you’re discussing your idea with someone, there are levels of detail you can reveal. A broad concept of the problem and possible solutions is unlikely to reveal anything sensitive, so you can usually discuss this freely to see how people react.
If there’s positive feedback and you want to explain your ideas in more detail, you can ask them to enter into a non-disclosure agreement (NDA).
An NDA is a legally binding contract that obliges them to keep your idea secret. The terms of the contract make it clear that they cannot share the idea with anyone else and they cannot develop it themselves. If they do, they’re in breach of contract and you can claim compensation from them.
This is where many of the myths arise. People tell me that non-disclosure agreements aren’t worth the paper they’re written on because whoever they disclose the idea to only has to change three things and then it’s a new idea.
This isn’t true and the real problem is often in the quality of the non-disclosure agreement. A generic NDA downloaded from the internet is not going to protect you anywhere near as well as a professionally drafted agreement specific to your idea.
Also, as I explained in a previous article (Seven practical tips for protecting confidential information), a non-disclosure agreement is not the only way to protect confidential information.
Protecting the business
Once you have proved the concept for the business and the idea becomes a reality, you can start protecting the different elements of it.
This is where you use intellectual property rights to their full advantage. Going back to our app example, there are many different elements you can protect.
For example, you can protect the brand, you can protect the layout, and you can protect the text, music and pictures within it. (I explain all of this in more detail in my article: Essential legal considerations when developing a new app.)
However, from the business perspective, the really valuable part of the app is likely to be the database of people who use it.
This is because when you have solved one problem for them, you can think about solving other problems too. Having already bought from you, your customers know you, like you and trust you.
Therefore, they’re more likely to buy from you again and you can develop a whole suite of products and services to offer them.
Protecting the value of the business
The more repeat customers you have and the less risky the business is, the more valuable it will be and we can use your customer database to help explain this.
It’s far easier to sell additional products and services to existing customers than to keep finding new ones. This is why a database of people who have already bought from you is extremely valuable. They are all potential customers for your other products and services too.
The database will contain personal data so as valuable as it is, it’s also a potential liability if the data isn’t handled properly. Whenever you’re dealing with personal data, you must comply with the data protection laws. If you don’t, there’s an increasing risk of being fined.
All of your products and services should then be packaged into a limited company structure, particularly if you want to grow your business by attracting investment.
A limited company has a life of its own, separate from its owners and this also makes it more valuable. With a limited company, an investor can buy shares and help it grow. When the shares increase in value, they can be sold to realise a return on their investment. This wouldn’t be possible if they were investing in an idea or even a single product.
If you have any questions about starting a new business or protecting a business idea, please feel free to email me at firstname.lastname@example.org and I’ll happily answer them for you.
Catch up on some of David’s recent Business Advice articles:
- A checklist of legal issues to consider when rebranding a small business
- Essential legal considerations when developing a new app
Sign up to our newsletter to get the latest from Business Advice.