What Investors Check in IP Due Diligence Before Funding

IP due diligence rarely kills a deal outright. What it does is move money: a missing assignment becomes a closing condition, an unresolved open-source question becomes an escrow holdback, and a trademark filed in the founder’s personal name becomes a special indemnity. The investor’s counsel is building a list of problems and pricing each one. If you know the list in advance, you can fix most items for a few hundred dollars in filing fees and a week of signatures instead of conceding valuation at the table. Our intellectual property practice runs this review for sellers before the buyer does, for exactly that reason.

Chain of title for every core asset

The first question is simple: does the company actually own what it says it owns? Counsel will ask for signed invention assignment agreements from every employee, signed contractor agreements with assignment language from every freelancer and agency, and a founder IP assignment covering work done before incorporation. They will match names on those documents against the commit history, the design files, and the inventors listed on any patent application.

Gaps here are the most common finding and the most fixable. A confirmatory assignment signed now cures a contract that was never signed in year one, as long as the person is still reachable. Our post on who owns IP created by employees and contractors explains which default rules apply when nothing was signed, and why “I agree to assign” language is weaker than a present-tense grant.

Registrations and their status

Next comes a schedule of registered IP: trademark registrations and pending applications at the USPTO, copyright registrations, patents and applications, and domain names. For each one, counsel checks the owner of record, the goods and services covered, maintenance deadlines, and whether the registration matches how the brand is actually used.

Three findings come up again and again. The trademark was filed by a founder, a predecessor LLC, or a foreign parent rather than the operating entity. A registration is coming due for a Section 8 declaration of continued use between the fifth and sixth year and nobody calendared it. The company’s main product name was never searched for conflicts, which is a problem our trademark search and clearance page addresses in detail. Recording assignments and filing missed declarations before diligence starts removes all three from the list.

Inbound licenses and open source

Everything the product depends on but does not own is an inbound license: commercial software, APIs, datasets, fonts, stock images, and open-source libraries. Counsel wants to see the license terms and confirm the company is within them. For paid licenses, the questions are whether the license is transferable in a change of control and whether usage caps have been exceeded.

Open source gets its own review. Permissive licenses (MIT, Apache, BSD) rarely raise concerns. Copyleft licenses (GPL, AGPL, and similar) can require release of source code for anything that incorporates the library, and a buyer will run a scan of the codebase to find them. The fix is not to panic but to have a bill of materials ready, know which components are present, and be able to explain how each is isolated or replaced. A company that has never thought about this will spend the diligence period scrambling; a company with a policy and a current inventory answers in an afternoon.

Outbound licenses and encumbrances

Every customer contract, reseller agreement, and development deal that grants rights in the company’s IP is reviewed for scope. The concerning terms are exclusivity (did an early customer get an exclusive license in its field?), ownership of custom work (did a services contract assign deliverables to the client?), most-favored-nation pricing, and source code escrow. Any of these can limit what a buyer can do after closing and will be priced accordingly. Our post on key terms in an IP licensing agreement walks through the clauses that cause the most trouble in diligence.

Trade secret practices

Buyers who are paying for proprietary know-how want to see that it is actually protected. They will ask for the confidentiality agreements signed by employees, contractors, and vendors; the access control policy; the onboarding and offboarding procedures; and evidence those procedures were followed. If the secret sauce has been shared with partners without an NDA, or former employees left with laptops that were never collected, the buyer will discount the asset or ask for a representation they know you cannot give cleanly.

Claims, disputes, and freedom to operate

The final section covers anything that could become a liability: cease and desist letters sent or received, pending litigation, oppositions or cancellations at the Trademark Trial and Appeal Board, DMCA notices against the company’s content, and any known third-party patents that cover the product. Sellers should disclose these fully. An undisclosed demand letter discovered after closing is a breach of the IP representations, and the indemnity for that breach often sits outside the ordinary cap.

Preparing for IP due diligence early

A seller-side review three to six months before a raise or sale lets you order the fixes by cost and impact. Most chain-of-title issues close with a signature. Registration ownership closes with a recorded assignment. Open-source questions close with an inventory and, where needed, a swap of one library for another. Trade secret gaps close with policies adopted and training logged. Our mergers and acquisitions team coordinates the IP schedule with the rest of the disclosure so the representations you sign at closing are ones you can stand behind. For background on the four categories of IP a buyer will sort your assets into, see intellectual property law in the U.S..

If a financing or sale is on the horizon, a consultation with Capitol Law Partners can audit your IP schedule before the buyer’s counsel does. Schedule a consultation.

This article is for informational purposes only and does not constitute legal advice. No attorney-client relationship is formed by this communication.

Attorney Cagatay Ersoy. Practical strategy for founders, investors, and growing companies.

Need help with this topic? See our IP strategy and protection page or schedule a consultation.