INTRODUCTION
Private investment from overseas is vital to sustaining Italian start-ups and innovation. However, it is also a method for foreign investors to masquerade their real intentions and to gain control over technological know-how.[1] Italian start-ups, but start-ups in general, should always remember that their competitive advantage is based on the control they exercise over their technological know-how. Once this is lost, no potential investor would see any opportunity for revenue. This “technological know-how expropriation” is a very common theft mechanism that does not require any coercive appropriation of property.
IN DEPTH
The classic case is the one of an investor who approaches a start-up moving to the U.S. The investor asks the start-up members to see their intellectual property to determine whether the investment is worth it.[2] The next thing you know is that the investor has taken your intellectual property and uses it to her own advantage by setting up his own business in a foreign country. This is a reminder that strategic alliances can turn into IP battles. And this is the last thing an Italian start-up wants; facing the scenario of a litigation before a U.S. court with massive costs to sustain and a predictable ending.
Start-ups that are looking at the U.S. market as a potential market must understand the importance of implementing compartmentalized due diligence before any other pre-disclosure legal safeguards. Entering the U.S, market without a precise understanding of its regulatory framework is a common mistake I have seen multiple times. And the outcome is always the same; your opportunity to scale up your product is lost forever.
What should you do?
You need to identify predatory patterns. Remember, any investor is a potential predator concealing its true intentions.
The most important step is to invest in the implementation of compartmentalized due diligence. Predatory entities often use the pre-investment diligence phase as a trojan horse to legally or covertly acquire proprietary data without executing a check. Due diligence is based on “credibility” and the understanding that before anything may harm your know-how, you have already established a solid plan to protect all parties involved. Opportunities and risks must be identified and dealt with to ensure strategic intent is realistically attainable with desired risk-reward relationships.[3] Among the common red flags are:
- Excessive Demands for Deep Technical Secrets: Investors legitimately evaluate technical capabilities, but predators demand underlying blueprints, raw source code, or unencrypted algorithmic parameters before providing a term sheet.
- Aggressive Resistance to Standard NDAs: While institutional VCs rarely sign Non-Disclosure Agreements (NDAs) for initial pitches, entities seeking theft will flatly refuse NDAs even when moving into deep, proprietary technical reviews.
- “Ghosting” Following Data Transfers: A classic pattern involves the investor dragging out the diligence process, requesting highly granular technical data, and abruptly cutting off communication once they possess the files.
It is extremely important to look at the business structure of the potential investor:
- Convoluted Shell Structures: The capital originates from newly formed, offshore shell companies or special purpose vehicles (SPVs) with no clear public footprint, ultimate beneficial owners (UBOs), or verifiable track records.
- Unusual use of Intermediaries: Negotiations are managed by third parties who refuse to introduce the actual principles financing the round.
These are only among the few red flags a start-up should consider when entering the U.S. market and negotiating with a potential investor. Establishing pre-disclosure legal safeguards is also critical and you should always consider hiring an U.S. based attorney who has the legal expertise to protect you.
CONCLUSIONS
Ultimately, the best defense is recognizing that due diligence is a two-way street. A legitimate U.S. investor will respect strict governance and phased disclosures, while predatory actors will usually walk away when confronted with rigorous compliance barriers.
[1] https://sloanreview.mit.edu/article/the-hidden-battle-for-ip-protection-in-alliances/
[2] https://www.marketplace.org/story/2024/08/22/u-s-startups-should-be-wary-of-knowledge-theft-disguised-as-investment
[3] Richard Steinberg, Governance, Risk Management, and Compliance
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