How Much Should I Reveal to Potential Investors?

When seeking financing, remember what business plans to share and what to keep to yourself.
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This story appears in the January 2004 issue of Startups. Subscribe »

Q: How do I keep my business idea confidential while seeking out investors?

A: This is a very legitimate question. However, let me first make some general comments about looking for investors.

When entrepreneurs start out, they dream of the day when their product or service will become the hottest thing on the market. After all, who doesn't want fame and fortune? However, some people think that the only way they can make their entrepreneurial dreams a reality is to get outside investors. This is not always the case. Many businesses remain privately owned for years, never seeking outside funding from anyone. After all, there are so many different ways to acquire the initial capital necessary to start a business. If you have a very simple business idea, then the best thing for you to do might be to use your own money. Why be indebted to someone else if you don't have to be? After all, you will have enough to worry about when trying to produce, advertise and sell your products or services.

However, if your business idea is somewhat complex or requires advanced technology, then you may find yourself in need of some heavy capital. Even in this case, you may want to think about borrowing money from wealthy friends or relatives first, and if that's not feasible, then think about acquiring a small business loan.

If none of those options will produce the amount of money you need, then you may want to begin courting outside investors. In any case, what you have to remember about investors is that they most likely acquired the money they have through making intelligent business decisions. Why would they want to give their money to you unless you can prove that they will not only get their original capital back, but also make a return on their original investment?

You must always remember that, while an entrepreneur is the catalyst for a business, the basic rules of economics determine whether an entrepreneur is successful or not. It's sort of like being an artist. You can have the best ideas for paintings and all the talent in the world to create them, but if you cannot market and sell your art, then no one will ever know who you are or buy the pieces. If you want people to invest in new a canvas, paint and brushes, then you have to prove to them that your work will bring in money. Only when you are secure in your idea-and when you have enough knowledge to market it and the proper support network in place to grow it-should you seek outside investors.

Now, if you are confident that you have a viable idea for a business and are ready to seek outside investors, then you will definitely want to protect your idea. After all, another one of the fundamental aspects of business is competition. People are always looking to take ideas and make them their own. This is why big companies like Pepsi do not tell Coke about their new product ideas and vice-versa.

The key to keeping a business idea secret is to never tell anyone who may have the time, money or resources to make your idea into a business before you can.

You are probably safe telling immediate family members about your idea, and sometimes close friends in order to get their opinions, but you probably shouldn't show an idea to a potential investor until he or she has signed a nondisclosure agreement. For more information, read Copyrights, Trade Secrets and Patents.

In the end, it is often very hard to prove in court that someone stole your exact idea. That's why you should always consult your attorney before seeking outside investors and have the proper nondisclosure agreement in place. Idea theft is a sad fact of business, but if you keep yourself educated, you will be on your way to becoming a successful entrepreneur.

Brian O'Rourke is the CEO and publisher of EnTrends, an online publication devoted to exploring how entrepreneurs work and live.


The opinions expressed in this column are those of the author, not of Entrepreneur.com. All answers are intended to be general in nature, without regard to specific geographical areas or circumstances, and should only be relied upon after consulting an appropriate expert, such as an attorney or accountant.

Edition: December 2016

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