One issue that often kills investment or acquisition deals for startups is intellectual property. During due diligence, entities seeking to invest in or acquire a startup review whether the startup owns or has valid licenses for all the intellectual property that it uses. This involves reviewing registrations and related assignment or licensing agreements. In final agreements, startups also make representations and warranties that they have right to the intellectual property they use and that they are not or will not infringe on other parties’ IP rights. Startups will want to make sure that their founders and employees have signed agreements that assign the intellectual property they develop to the startup, and that the startup has full rights to the IP, including the right to any modifications. A startups is obviously not an attractive investment or acquisition target if a founder or employee own and can simply take the IP behind the company’s products or services with them elsewhere. If IP has already been registered in the name of founders or employees, the startup should take steps to ensure that such registrations are assigned to the startup. If the startup has to license IP, it should make sure that it has sufficient rights to achieve the company’s goals, including the ability or right to modify or sublicense the IP, if necessary. Investors or acquiring entities will also want to review any royalties the startup may have to pay for licensing deals, and how those royalties affect and will affect the startup’s finances. Finally, investors or acquirers will want to do due diligence as to whether a startup is facing or may face IP litigation.
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