Startup Competition Risks

This coming week, the Indiana University School of Infomatics-sponsored “Building Entrepreneurs in Software and Technology” (BEST) Fund will be hosting final rounds in its business model/startup competition for tech-minded entrepreneurs. For the past few months, I have had the opportunity to work with a talented team of IU students and entrepreneurs who entered this competition back in October. We were fortunate enough to advance to the final round and we are very excited for the upcoming pitch. Unfortunately, I won’t be there to see it because the final rounds take place on a Wednesday afternoon during one of my classes!

That being said, startup competitions can raise some red flags for entrepreneurs and it is important to be cognizant of them. These issues, of course, are things that most entrepreneurs and business students will be familiar with. Law students, on the other hand (and I am speaking from my own experience), may be less familiar with these issues.

One of the most important things entrepreneurs need to look out for when entering competitions is the fine print. After all, it is easy to get caught up in the prospects of winning thousands, if not tens of thousands, of dollars and then rushing to submit your great idea. Different competitions, however, have different rules and regulations and potential contestants need to know what they are getting into.

For example, this upcoming BEST competition conditions contestants’ receipt of prize money on an equity position for the sponsoring investors and the school. Contestants who win $100,000 give 15% to investors and 5% to IU; $50,000 give 7.5% investors and 2.5% IU. The BEST competition does not try to “hide the ball” with this term. It is clearly spelled out on their Rules and Regulations page. Furthermore, there is nothing unusual or wrong about this. Most startup competitions, including the most widely known, do take equity from the startups they support. Entrepreneurs who are worried about dilution may want to avoid equity-for-money competitions and seek outside investment or look for competitions that do not require contestants to give up equity in consideration for prize money.

Even if you don’t mind giving up equity, there are other concerns to be had. For instance, once an entrepreneur enters their idea into a competition, they are likely entering their idea into the public domain thus decreasing the patentability of that idea, product, or service. If you are considering entering a competition and you think you may have some intellectual property rights that add value to your idea, you should consult an attorney before entering the competition. Competition sponsors rarely use non-disclosure agreements and they generally will not assist contestants with their IP rights.

All of these risks aside, startup competitions can give entrepreneurs the experience and resources they need to get their idea off the ground. Although law students are not typically exposed to business model or startup competitions, these events can be a great way to gain insight into the issues facing emerging businesses and entrepreneurs. Not to mention, law students love to read the fine print!


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