By Anthony Cammarata Jr.
The Wall Street Journal published an article yesterday after interviewing more than two dozen entrepreneurs, investors, and deal advisers who all claim that Amazon.com Inc., appeared to use the investment and deal-making process to help develop competing products. In some cases, the interviewees alleged that the tech giant met with startups about potential takeovers, sought to understand how their technology works, then declined to invest, and later introduced similar Amazon-branded products. A link to the article can be found below.
The startups who claim to have been taken advantage of by Amazon learned a lesson that we often emphasize to our business clients to avoid similar situations. In preparing for a meeting to discuss a potential transaction (whether it be for an acquisition, future partnership, joint venture, franchise arrangement, or even distributorship) it is imperative that business owners first consult with experienced corporate attorneys to ensure that they utilize adequate means to protect their confidential and proprietary information.
Many business owners understand the concept of a Non-Disclosure Agreement ("NDA") and its uses in this context. Far fewer ensure that a truly effective NDA is put in place before they begin sharing information. While a simple form NDA from the internet may be more helpful than nothing, such LegalZoom or "one size fits all" agreements often prove inadequate when up against sophisticated opposing parties. Instead, the NDA should be tailored and customized to the specifics of your business, your proprietary information, and the potential deal being discussed. For example, a comprehensive description of what confidential and proprietary information is being protected by the NDA will provide significantly more protection than a less detailed identification found in most form agreements. Moreover, non-solicitation provisions and other restrictive covenants, which are often not included in a "standard" NDA, can be extremely useful to restrain the receiving party from attempting to do business with the disclosing party's clients or vendors, or from hiring the disclosing party's employees.
Aside from obtaining a proper NDA, there are numerous other steps a business owner can take to further prevent him or herself from becoming a victim like the entrepreneurs described in the Journal article. Filing appropriate patents for patentable technology, registering trademarks where possible, withholding valuable trade secrets at the outset of a deal, refraining from divulging vital business contacts, and developing a targeted approach to deal discussions are all measures that an attorney can assist with implementing to protect a business from being poached.
It can be tempting when potential investors come knocking to be enamored with the possibility of a lucrative deal and rush into discussions and negotiations without thinking about the impacts and consequences such discussions can have on the business moving forward. If your business is presented with such an opportunity, remember the stories included in the Journal's article below and take the time to seek counsel before revealing too much information and exposing your company to unforeseen competitive risks.