IP due diligence in an M&A context is a critical exercise to verify the asset you're buying. Your goals are to uncover risks (like 'copyleft' open-source code and missing invention assignment agreements) and validate ownership of patents, software, and trademarks. Use your findings to negotiate deal terms like specific escrows or purchase price reductions, and remember to involve your technical team, not just your lawyers.
Key takeaways
- Demand a signed CIIAA from every person who ever wrote code for the target.
- Run a deep open-source scan immediately; 'copyleft' licenses are a five-alarm fire.
- Verify patent ownership and claims actually cover the commercial product.
- Treat founder IP history as a major risk until proven otherwise.
- Use diligence findings (e.g., missing contracts) to negotiate specific escrows or price reductions.
- Don't delegate IP diligence entirely to lawyers; your CTO must be involved.
You’ve signed the LOI. The price is agreed upon. But the most dangerous phase of your acquisition is just beginning: due diligence. In a tech M&A deal, you are primarily buying intellectual property. The code, the patents, the brand, the data—this is the foundation of the company’s valuation.
Assuming this IP is clean is a catastrophic error. IP diligence isn’t a checkbox for lawyers to handle in a back room. It’s a foundational audit of the asset you’re buying, and it’s where deals get repriced or fall apart. A botched process means you could be buying a ticking time bomb—a lawsuit, a worthless patent, or a product built with code you don’t have the rights to use.
Your objective during IP diligence is simple. You must answer two questions:
Do they actually own it? You need to verify that the legal ownership of every asset—code, patents, trademarks—is held by the company, not the founders personally, their former employers, or a litany of ex-contractors.
What liabilities are attached? You’re hunting for landmines. This includes patent infringement risks, open-source license obligations that could force your proprietary code into the public domain, and disputes over brand rights.
After the LOI is signed, the seller will open a "virtual data room" (VDR) containing thousands of documents. This is where you and your team—lawyers and engineers—go to work. Here’s what matters most. 1. Software and Copyrights (The Crown Jewels)
For nearly every tech company, the software is the most valuable asset and the most common source of deal-killing problems. This is not just a legal review; your CTO or senior engineering leader must be involved here.
This is your first and most urgent priority. You must get a complete software bill of materials (SBOM) and analyze the licenses of all open-source components. Tools like Snyk, Black Duck, or FOSSA can automate the scan, but a human analysis is required.
The "Copyleft" Threat: Pay excruciating attention to "viral" or "copyleft" licenses,…
Permi…
Frequently asked questions
- What's the most common deal-killing IP issue you see?
- By far, it's two things: 1) pervasive use of 'copyleft' open-source licenses (like GPL) that require you to publish your proprietary code, and 2) missing invention assignment agreements (CIIAAs) from founders or early engineers, which means the company doesn't legally own its own product.
- How much does a proper IP diligence process cost?
- It varies based on deal complexity and the size of the target's IP portfolio. For a typical early-stage tech acquisition, expect to spend between $20,000 and $75,000+ on legal fees specifically for IP diligence. The cost of skipping it is potentially infinite.
- Can't I just fix these IP issues after the acquisition closes?
- Sometimes, but it's much harder, more expensive, and riskier. Post-closing, you have no leverage. A former contractor who needs to sign a document can demand payment, and a required code rewrite to remove tainted open-source code happens on your budget and your timeline.
- What is a CIIAA and why is it so important?
- A Confidential Information and Invention Assignment Agreement (CIIAA) is a contract where an employee or contractor agrees that any intellectual property they create for the company belongs to the company. Without it, the individual creator can legally claim ownership of the code or invention, even if you paid them to create it.
- My lawyers are handling IP diligence. Do I need to be involved?
- Yes, absolutely. IP diligence is a team sport. Your lawyer can identify legal risks in contracts, but your CTO or Head of Engineering needs to assess the open-source scan results, estimate rewrite costs, and confirm that patent claims actually map to the commercial product.
