Every so often we get calls from companies either in the process of raising funds on Kickstarter or just having completed their Kickstarter fund-raising.
Almost invariably, our conversation goes something like the following:
Company with product: We just raised money on Kickstarter and we have lined up a China manufacturer for our product and we are thinking it is time to get a China lawyer involved, though we do not have much money for legal yet.
Me: Well, if you are going to spend money on anything, the most important thing is your intellectual property.
Company with product: We figured we would deal with that later. Right now we just want someone to review our NDA and then review the manufacturing contract we will be drafting.
Me: Who drafted your NDA, an attorney with China experience?
Company with product: No, we did it ourselves. It really just needs a quick review.
Me: I have never seen a self-drafted NDA that just needs a quick review for China. To work for China, you need a China NDA, which we actually call an NNN Agreement. NDAs are geared towards preventing disclosures of information but your biggest risk in China is typically not going to be your manufacturer disclosing your information; it’s going to be your manufacturer stealing your product and selling it worldwide and to your own customers. Also, to be effective, the NNN Agreement should be in Chinese and it should contain liquidated damages provisions. There are all sorts of other things that need to go into it as well, but these are the basics. The same holds true for an OEM Agreement. But really, my biggest concern is your IP.
Company with product: Well, to be honest with you, when we listed the risks on our Kickstarter, we said that the risks were manufacturing delays. We didn’t even mention our IP and so I don’t see how we can pay you anything right now to protect that.
Me: Well, if you cannot afford to protect your IP, it is probably not worth your money to pay for contracts. I mean why spend money for an NNN to protect yourself against a few companies — your potential manufacturers — when you are not able to spend money to protect yourself against the millions of other people out there who could steal your product? And as I hinted, we will need to start over on these contracts, using your draft contracts for nothing more than to determine certain facts regarding what you are doing. I really think that you should at least register your key trademarks.
Company with product: Yeah, well, I’ll talk all of this over with my partners.
I am writing on this now because twice this week I have received calls from “companies with product” who are now encountering serious (and expensive to remedy) difficulties arising from their failures to button down their IP protections when we spoke a year or two ago.
Bottom Line: Failing to protect IP early on is probably the most common mistake made by start-up companies.