FORTUNE Small Business:

Got an idea that could make you rich?

What you should know to protect your intellectual property.

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(FORTUNE Small Business) -- Dear FSB: How do I present a novel service or software idea to a large business and still protect my intellectual property (IP) - and make some money?

- Sam Klaidman, Middlesex Consulting Group, Framingham, Mass.

Dear Sam: A lot of businesses wisely secure partnerships with large corporations to help them refine, expand and properly market intellectual property. But it's best to be cautious when you pitch your idea.

Just this week a woman sued Victoria's Secret for rejecting a product she pitched them and then putting the product on the market.

"I've seen cases where small business owners without much money turn to large companies for help and then lose it all," says attorney Ian Stock, of Entreprelaw in California.

But fear not! You can follow the many who have secured successful partnerships, so long as you legally prep yourself and learn to recognize the good and bad signs.

Legal safeguards
From a legal standpoint, you can protect yourself with a nondisclosure agreement. Ask the company you are approaching to sign it before talking to you.

"This is a relatively simple contract to protect the confidentiality of each side's IP," Stock says. "It states that you will not use any information you learn about the other party unless you are doing business together."

Stock also suggests that when you do meet with the company, you present them with some of your technology as a first step, but not all of it: "Wanting it all at once can be a bad sign. The partner should understand that you want to establish a trust first."

Doug Armstrong's Melbourne, Fla., company, TyraTech, has secured partnerships with the likes of Arysta LifeScience, Syngenta (SYT), Scotts (SMG) and Kraft (KFT, Fortune 500) to further development of his natural-oil insecticide and parasiticide products.

"Right away, we saw that we needed partners with expertise to get shelf space," he says. "Furthermore, I knew that partnering with a large company can give a small company credibility from an investor's perspective."

So how'd he do it?

Using what he had learned about securing business relationships from his days in academic research, Armstrong sought out market leaders that lacked the types of products that TyraTech could provide. Then, he required prospective partners to formalize a relationship that includes regular plan reviews, to ensure that management on both sides sees eye-to-eye.

Armstrong also only partners with companies willing to invest in R&D projects that benefit his company as well as his larger partner - and he requires all partnership conditions to be documented in a written partnership agreement.

"If the large company sets up a wall and says 'toss us your best and we'll toss it back if we don't like it,' that's no good," he says. "Keep on top of their line of thinking by meeting at least once a month. If you can't get that commitment, you don't want to be in that partnership."

Licensing
When you agree to work with a partner to develop and market your idea, you are licensing your IP to them. Stock believes that in many cases, high tech small businesses should be wary of exclusive licensing agreements.

"If you're not careful, exclusive licenses can just be a cheap way of buying the technology. If they see the value in your technology and don't let you license to others, they will get a monopoly on it without purchasing it," he says. "If you sense they are getting big rewards for a small fee, it might be better to sell it outright."

Armstrong adds that exclusive licensing agreements can be limiting if the partner doesn't pursue all the possible markets for the technology. "Be sure that you include in your agreement with the company a clause that allows you to break free," he says.

TyraTech has had success with its licensing agreements. The trick, Armstrong believes, is to verify that the larger vendor has an active development plan and financial commitment.

"One way to ensure this is by asking the large company to put the money up-front and then earn it back," he suggests. "This is an incentive for them to create a development plan and a marketing plan that will exploit the rights in fair and timely fashion."

It's wise to hire a legal counselor for these negotiations - ideally one who has experience structuring early-stage technology commercialization deals.

Still worried? "Sometimes it takes a leap of faith, but at the very least, look at the company's history," says Stock. "To a degree, large companies' reputations precede them and indicate whether they play fairly."

Finally, keep in mind that big companies often have the same fears that you do.

"They are scared you will steal their IP," Armstrong says. "Or that they will help you develop your technology and then you will take it to a competitor. The trust has to go both ways." To top of page

Have you pitched your idea to large corporations? What precautions have you taken to protect your IP? Talk back here.

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