Seeding - How to protect IP

O

oversea

I'm considering getting 'seeded' by an existing prop firm or HF. Much more than access to capital, I'm looking to gain operational support (especially additional dev resources). Admittedly, to really scale, I'd need additional capital - but if it were just the money, I could go about this differently. (fwiw, 'really scale' is relative, because all of the strats that we've been running are capacity constrained to some degree, but there is still enough scale for it to be interesting to such groups)

The strategies are not complicated, and to some extent are already being employed by many of these firms that would potentially provide seeding (certainly the ones that are best suited to the needs I've mentioned above). Our primary 'edge' (at least, for the strats that are currently up and running, and would be the easiest selling point to these groups), is certain aspects of implementation, which some of these firms may already be using themselves (or close to it, at least). So, I presume that early on, it will be pretty unavoidable disclosing information that I otherwise wouldn't want to.

How do I protect myself from having the 'IP' (for lack of better term) ripped off when pitching or during the vetting?
Of course, there's a concern the people that eventually do 'seed' us could exploit us as well at some point, but my feeling is that is a more 'manageable' risk (and anyways can be handled later on).

Could anyone (especially that is in the institutional space) comment or make some suggestions about this concern? I'd also welcome any general pointers with regards to approaching these groups.
 
Consult a lawyer.

I am not in trading development but this situation often came up as a consultant for firms that would pitch an idea to me as a software engineering consultant. I can tell you how I felt sitting on the other side.

First they made me sign an NDA in perpetuity. Meaning at any time between my employment with them and anything in negotiation, and going forward some number of years, I cant legally say anything about what they did except in the most vague sense. This protection works as long as you have the legal team to enforce it - I can be sued if I told you tomorrow what a particular firm was doing exactly with their hardware. This is pretty damning. There's virtually no way to get around this. If I made a business similar I could potentially have an investigation (at their cost) opened up on me to confirm I wasn't stealing anything and I'd be obligated, legally, to divulge anything that may conflict. Be careful here because you can't just sue people willy-nilly. I would have a contract lawyer available to red line things for me (a few hundred bucks for an hour of their time saves you millions down the road). NDAs like all things can and will be negotiated. Especially if one of you needs the other more than they need you. Just make sure you understand - an NDA is an "all or nothing approach". I've turned down deals with companies because they wanted me to sign an NDA for an idea I thought was a college kid's dormroom dream cooked up after too much dope smoking. I would get ideas pitched to me probably twice a week during peak silicon valley hype days (2015-2018) when money was free to everyone. Usually in the crypto space. An NDA would get a "no thanks, not interested" from me.

Second they would often hide information. For example, they would tell me the 30 second elevator pitch but not tell me how it was built or developed. For you, this might be showing backtests with ratios, etc. I don't think to an investor it is important what you're doing so long as you can quantify the tail risk. This is good because you really don't need the entire scope to determine if something is feasible.

Third, recognize ideas are like assholes and everyone has one (some people have two). Your strategy is probably not unique, profitable, or as scalable as something they can deploy. A large firm, for example a prop or hedge fund, operates with different risk metrics, exposures, etc than some small fry (no offense) such as you. If you had their problems YOU'D be the one looking for people to invest in! Why would a prop risk you disparaging their firm on twitter/blogs/news for veritably stealing your ideas and potentially blackballing themselves from buying into other strategies going forward? Always ask yourself "what risks do they take stealing my idea?"

Importantly get a contract lawyer to help you draft an NDA and walk you through IP protection. If your strategy makes $500k a year, spending $5-8k on that to get a lawyer to draft an agreement, negotiate, and sit in the meeting with you is money well spent.
 
There is another approach you could take. You could seek out a someone with technical expertise that can help automate your strategies and enter into some sort of partnership. I have done so with a couple of individuals that had solid strategy ideas but did not want to spend thousands of dollars in development costs. As the developer, it really came down to the strategy idea, level of effort and is the person easy to work with. In both cases both parties own the IP. I am not saying this is the best approach for you, but it is a viable option. Of course you need to find a developer who is competent, has an interest in your approach and is not going to try and rip you off.
 
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The NDAs are just a threat and in trading, almost impossible to enforce. Say you copy what they did and did not use outside help, they cannot query the exchanges or regulators for your trades without concrete proof beforehand. They will never have any proof. Now if you include other people, they will be a liability and it's a different story.
 
fan27 said:
There is another approach you could take. You could seek out a someone with technical expertise that can help automate your strategies and enter into some sort of partnership. I have done so with a couple of individuals that had solid strategy ideas but did not want to spend thousands of dollars in development costs. As the developer, it really came down to the strategy idea, level of effort and is the person easy to work with. In both cases both parties own the IP. I am not saying this is the best approach for you, but it is a viable option. Of course you need to find a developer who is competent, has an interest in your approach and is not going to try and rip you off.
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Seems I should clarify...

I've built out a stack over the last few years, with a number of developers - some that I've employed and some contracted. I'm looking to grow, or at the very least, be better staffed and overall better positioned for running current operations. Rather than try and hire the necessary people myself (a couple of devs and ops people), I'm exploring getting seeded by an existing firm - in an arrangement where I'd be giving up equity and they'd provide some of them necessary manpower and other resources.
 
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