IP Theft – Starting that “Side Project”

“He doesn’t own my brain” – Oh, yes he does.

Doing the entrepreneurial gig is hard. There are countless barriers and endless hurdles to overcome, and many entrepreneurs relentlessly power through them.

But stealing IP is never, ever, appropriate.

Here’s the fact pattern:

Entrepreneur starts a company and takes on investors. One of the investors is toxic and even fraudulent, stealing money from the company, and violating countless securities regulations. After bringing the investor into the company, the entrepreneur finds out that the investor is under investigation by the Securities and Exchange Commission.

The entrepreneur is justifiably angry and, after many attempts, cannot seem to get rid of the investor.

So she starts a second company to develop the next generation of the product from the first company. She does this at the same time she has a fiduciary responsibility to her first set of investors (which includes the toxic investor she is trying to avoid).

IP theft is never justified.

The entrepreneur is, of course, frustrated with the investor and wants a clean start. So she starts a ‘side project’ that uses technology that she helped develop in the first company.

She justifies starting fresh with the need to disassociate herself from the investor. The investor is turning the company into a dumpster fire of criminal investigations, internal disputes, and lawyers. It will, most certainly, run the company into the ground.

Even so, this does not justify her ‘side project’ that essentially steals IP from the first company.

The bargain of the knowledge worker.

When you work for a company, you make a transaction. In the old days, you gave the company your time and effort, like turning a wrench on the assembly line. In the ‘knowledge economy,’ you give your time but you also give your intelligence, education, experience, and ideas.

In the ‘knowledge economy,’ you exchange your ideas for money. And you get paid handsomely for it. So you should not complain.

Innovative people, by nature, know how valuable their ideas are. They know that their insights, imagination, and concepts are far more valuable than their salaries.

When I was at Hewlett Packard, I developed a cell phone tester that generated millions of revenue. I got a $100 gift certificate as bonus, plus that coveted 2.5% raise.

I knew that my ideas were far more valuable than the salary that I was getting, but that was the bargain. I gave my best ideas to the company, and they gave me a salary.

Our entrepreneur above felt the same way. Her company was being destroyed by an investor who stole from the company, and she was working furiously to get rid of the investor.

Side projects as IP theft.

If you are working with your ‘brain,’ the company ‘owns’ the output from your brain. This is true of every engineering position I have ever had, and it is 100% true of an entrepreneur/founder who has investors.

Once you take on investors, every ounce of energy and every thought you have are supposed to be dedicated to those investors. You need to do what is in the investor’s best interests, not your own. In most cases, developing and launching a product, then growing the business is in perfect alignment with the investors. They took a big risk on you and your company, and they deserve your full attention and effort.

Salaried employees are in the same boat, as their duty as an employee is to do the best job they can for their company. The salaried employee does not have the same level of legal liability as the entrepreneur, but the same principles apply.

Plain and simple: if you work for someone as a salaried employee or as an entrepreneur, someone else owns your output. If you try to keep that output for yourself, you are stealing.

What this means is that while you are taking a salary – or while you have investors – ‘side projects’ that are not given to the company are always theft when they relate in some way to the company.

The gray line is for salaried employees, not entrepreneurs.

There is a gray line. Some side projects are so far removed from the business of your company that there is no conflict. If you are a salaried engineer for an AI software company and have a side project in landscaping, the company should not care.

Note: if you work for someone else, absolutely, without exception, get a written letter from your employer before starting a ‘side project.’ I don’t care how ‘obvious’ it is to you that there is not a conflict, you always need approval in writing.

But there is really no gray line for entrepreneurs. Entrepreneurs are not just tasked with developing the ideas that they pitched at the angel investor event. Entrepreneurs are tasked with being a good steward of capital, and trying to grow that capital for investors. This includes the need to pivot to new products when the first idea did not work out.

In other words, there is no gray line – ever – for an entrepreneur to start a ‘side hustle’ project while still being responsible for investor money. The investors always own that side hustle.

IP theft is not justified because someone else wears the black hat.

Founders and entrepreneurs have a fiduciary duty to their investors, no matter how corrupt the investors.

Our entrepreneur made a very poor choice in bringing in an investor who was fraudulent and stole from the company. But that does not – in any way – justify her theft from her investors.

Many people might not consider it theft to start a side project, but in her case, it absolutely is theft.

She began a new project using all of the ideas, concepts, market research, connections, and background of her first company. She may have started with a clean sheet and recoded all the software from scratch to avoid ‘copying’ from her first company, but even then, starting from a clean sheet allowed her to refactor the code and clean up whatever technical debt was in the original code.

She did all of this because she was angry about being harmed by the fraudulent investor, and she wanted him to have no part in her success.

She cut out the current investors by stealing everything they had paid for, then started a brand new company without them.

Calling the FBI, not the SEC.

Our entrepreneur committed trade secret theft, in addition to any misrepresentations she made to her original investors and any new investors for her ‘new’ company.

The laws against trade secret theft has teeth.

18 U.S. Code ยง 1832 – Theft of trade secrets

(a)Whoever, with intent to convert a trade secret, that is related to a product or service used in or intended for use in interstate or foreign commerce, to the economic benefit of anyone other than the owner thereof, and intending or knowing that the offense will, injure any owner of that trade secret, knowingly … steals, or without authorization appropriates, takes, carries away, or conceals, or by fraud, artifice, or deception obtains such information … shall, except as provided in subsection (b), be fined under this title or imprisoned not more than 10 years, or both.

For trade secret theft, you call the FBI, not the SEC. Trade secret theft is a federal crime, subject to 10 years in jail – for each offense.

None of this is justified because an investor also committed crimes and stole from the company. Stealing trade secrets was a crime not only against her original investors, it put her new company in jeopardy. This meant that her new investors – who presumably did not know of her theft – had a cause of action against her for misrepresentation. They were/are harmed too, every bit as much as her original investors.

Trade secret theft might look harmless, but it is not. Angel investors put their children’s college education and their retirement money in the hands of entrepreneurs, who we expect to have the highest level of integrity and moral compass. Trade secret theft, like I witnessed in this entrepreneur, is one of the most dangerous and insidious crimes that can be committed by an entrepreneur.