The Game of Show and Tell
By Karen E. Klein
Q: While trying to put an acquisition together, I have constantly been confronted by a prospective investor, a potential venture capital firm, and, more recently, a possible partner who took proprietary information and either tried to go around me or take the deal from me. What's the best way to thwart deal-stealers?
-- D.F., Richmond, Va. A:
Q: While trying to put an acquisition together, I have constantly been confronted by a prospective investor, a potential venture capital firm, and, more recently, a possible partner who took proprietary information and either tried to go around me or take the deal from me. What's the best way to thwart deal-stealers? -- D.F., Richmond, Va.
A:That's a great question, one that frequently confronts entrepreneurs. It is important to know how to present a deal or pitch an idea in an enticing way -- but without giving too much away. If you're arranging an acquisition or looking to make one yourself, you'll need to seduce investors and potential partners, get them excited enough to want more details, but pull back before you reveal specific details. It's trickier than it sounds.
"I've noticed that entrepreneurs tend to fall into two camps: There's the group that's overly paranoid and won't talk to anyone, so they lose opportunities, and then there's the group that's too trusting -- they open the kimono and foolishly expose everything, to their eventual detriment," says Peter Cowen, an investment banker with Peter Cowen & Associates, which is based in Westwood, Calif. "There's a real art to revealing an idea or a deal in layers, as your comfort level increases, and you get something from the other party to show they're interested."
SIGN AND SEE.
That something could be a financial commitment, or the signing of a contract or nondisclosure agreement -- a legal document that binds the potential investor or partner from revealing the proprietary details you are disclosing. According to Cowen, while most investors and venture capitalists will not sign nondisclosure agreements up front, because they see so many ideas and deals that they can't risk the liability, they may agree to sign once they are sufficiently interested.
"I advise entrepreneurs to make their presentations compelling without revealing everything," says Cowen. "Follow a script along the lines of: 'We have a process, or an investment, that does X and that benefits Y.' If your audience asks how the process works, or what specifically the investment is, you ask them to sign something before you explain further. In other words, talk about the benefits of the deal and certain aspects of the process -- but don't reveal the secret sauce."
It isn't wrong to be careful when disclosing information about your company, your product, or a promising acquisition. Business is all about making money, and there are certainly companies and corporate officers who don't have any compunctions about taking that goal to the extreme -- even if it means compromising business ethics and responsibilities. And when it comes to inventions and new product ideas, there are major corporations that put considerable effort into snooping out innovations and stealing them before they can be patented or produced by a competitor, Cowen says.
ORIGINALITY IS NO PROTECTION.
"The fact that you've come up with the idea...doesn't safeguard you from someone stealing it away," Cowen warns. "They [investors and potential partners] won't respect the fact that it's your idea."
Your best bet at this point, since it sounds like you've already revealed proprietary information without legal protection, is to understand your vulnerability and try to shore up your position in the deal. What value do you bring to the table in this negotiation? What specifically makes your participation essential? Can you deliver key accounts or key managers and personnel that makes your position more appealing? Find ways to take the transaction back into your control -- even if that means cutting out the deal-stealers -- and you'll wind up negotiating from a position of strength, not weakness.
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