Is your startup ready for due diligence?
Do you even know what that means?
Let me explain what IP due diligence is and why your preparation today is important.
If you are very fortunate and a savvy investor or company wants to invest in or buy your company, your startup will likely be subject to a process called “due diligence.” This means that one or more attorneys will carefully examine your IP and company records — its contracts, licenses, assignments, and IP filings. They will ask a lot of questions about what you have done in the past and they will judge your credibility and IP knowledge.
The attorneys will be trying to find out what you have done right and what you have done wrong. They will be trying to find potential liability and risks for the investors.
Don’t kid yourself. It is highly likely that the attorneys will find where you have screwed up.
Importantly, the attorneys will be ascertaining whether your startup owns the IP it says it does or whether it has failed to do what is necessary to nail the IP to the company.
- Do you have proper signed, written IP assignment agreements with all founders, key contractors, and employees that transfer all IP to the company?
- Have you used cheap, sketchy foreign contractors to create your key technology with self drafted contracts?
- Do you really have the right to use the IP you say you do or are you missing a critical license from a university or consultant?
- Are former employers of the founders threatening to sue for trade secret misappropriation and ownership of the key technology?
These are just a few of the issues the attorneys will examine.
If the attorneys find problems, like your startup doesn’t own the IP or it’s at high risk for potential liability, your deal may be derailed.
Sometimes the problems can be fixed and sometimes they can’t.
Moreover, it can be a huge headache for you to try and track down what you are missing, like IP assignments from a departed founder or stray licenses to part of your code. For example, if you don’t know who created your software code or where it came from, you can be in big trouble if the code with the questionable genealogy is the foundation for your business. Or if you have an offer for a million dollars for your great website, your deal may collapse because your site is loaded with infringing material and you only have weak implied licenses to the content.
Make sure you do what you need to do to ensure that your startup owns it’s IP or has proper licenses–NOW. It may be simple to do today and impossible tomorrow.
You want to be prepared for IP due diligence and not delay or derail your future deals.
Jill Hubbard Bowman is an intellectual property attorney who helps startups do things right.
The information provided in this legal blog is not intended as legal advice and does not create an attorney-client relationship. Please do not submit questions or comments seeking legal advice or submit confidential information through this blog. By communicating through this blog, you understand and agree that the information will not be treated as confidential and the publisher has no duty to keep it confidential.