Imagine this: you have a revolutionary idea, the prototype is ready, and the investor arrives. Then suddenly comes the question: Great, but who owns the software? Who designed the logo?
If a startup is looking for investment, properly arranging intellectual property (IP) rights is essential. A good idea or new technology alone is not enough: if the startup cannot prove that it truly owns what it is offering, or if it does not protect it properly, the investment can easily fail — even during the first rounds of negotiations.
How does a typical IP due diligence process look?
Investors do not make unfounded decisions: before money leaves their pocket, they always examine what exactly you are trying to “sell” to them, and whether it is truly yours. This review is called IP due diligence. But what exactly do they examine in such cases?
What IP does the startup have?
When an investor becomes interested in a startup, one of the first questions will be exactly what kind of IP the company owns. This does not only mean officially registered assets — such as patents, trademarks and copyrights — but also every technological or business asset that may be important for the future of the company. This may include know-how, documentation of internal developments, trade secrets or custom software. The startup must be able to show what IP elements have been created and how these are tracked, protected and managed.
Who actually owns the IP?
The existence of IP alone is not enough. It is also essential that the startup holds the relevant rights. The investor wants to make sure that the company is genuinely entitled to use and exploit these assets. The aim is to clarify whether the IP is truly owned by the company, and whether it has remained with a developer, external partner or another party. A well-managed IP position means that every creator — whether an employee or subcontractor — has acknowledged in a contract that the result of their work becomes the property of the startup.
What risks may arise?
During due diligence, investors also examine what risks may be hidden in the IP position. These may include cases where patents or trademarks are not valid, or do not cover the target markets. It may also be a problem if the startup does not have appropriate confidentiality agreements in place, allowing know-how or trade secrets to leak.
The investor also considers how much the IP position may hinder future growth, and how easily any potential issues can be remedied. For example: can legal documents be put in order afterwards, can licence agreements be concluded, or does the technology need to be modified? The goal is to avoid hidden issues that may later cause litigation, market barriers or even product recalls.
What warning signs scare investors away?
Investors are most concerned by shortcomings that carry hidden legal risks. For example, if copyright in software developed by a previous subcontractor was not assigned in writing, then the company may not actually own that product.
While technology and business model development may be a public success story, a single unresolved IP issue may be enough to shake investor confidence.
“Who owns the code?” — Missing assignment of rights
You did not sign anything with the developer? Then the developer may own the code, not you. The purpose of assignment agreements is to clearly record that IP created by founders, employees and external contributors is transferred to the startup and does not remain personal property. An unresolved IP position represents a significant risk for investors, who may easily walk away from the cooperation as a result.
Missing registrations
If the startup does not ensure that all essential inventions and brand names are properly and timely registered, it may lose exclusivity. There have been cases where another party registered a startup’s product name, forcing the company to rebrand. It was not cheap.
Open source trouble
Did you use open source components without checking the licence terms? It may turn out that the entire software would have to be made publicly available. The use of open source software is extremely common among startups, as it speeds up development and reduces costs. At the same time, it may happen that a developer incorporates a code snippet under a GPL licence into the product without realising that this may require the entire software to be made open source.
Other pitfalls
In addition to the main IP problems, there are many smaller errors or omissions that may also deserve attention during investor due diligence. On their own, they do not necessarily doom the funding round, but taken together they may create distrust or generate further investigations and legal costs.
Incomplete documentation
Incomplete documentation and IP records are among the most common, yet often underestimated, reasons why a funding round may fail. If the documents are not in order, the value of the IP may not be provable either.
Inadequate confidentiality agreements (NDAs)
Poorly drafted or missing NDAs with partners, subcontractors or consultants may result in serious data protection and know-how losses, as an NDA is not a formality, but a way to protect your idea.
Improper licensing
It may happen that the startup previously entered into overly permissive or insufficiently restrictive licence agreements, for example by granting exclusive rights for a market. This may reduce the future exploitation value of the IP.
Lack of a unified IP strategy across different markets
If the startup does not secure international patent or trademark protection in time, competitors may easily exploit the lack of market protection in certain countries.
Do not forget: a good idea alone is not enough for success. That is why the most important sentence for a startup is:
„The company owns all intellectual property rights necessary for the operation and exploitation of the product.”
If you can state this credibly and with proper documentation, you are in a strong position.