IP Due Diligence: What Sellers Get Asked and Why It Matters
When a buyer's lawyers open the data room, intellectual property is usually where the first real problems surface. Not because sellers are dishonest, but because IP ownership tends to accumulate in a messy way over the life of a company. A contractor here, a co-founder who left there, a trademark filing someone meant to renew. None of it looks like a crisis day to day. All of it looks like a crisis during due diligence.
Our earlier post, What Buyers Actually Ask For in Due Diligence, covers the general document checklist a buyer will send. This one is narrower and written for the seller's side of the table. It focuses on the specific IP questions that tend to blow up deals, or at least blow up purchase prices, and what you can do about them before a buyer ever sees them.
Chain of Title Is the Whole Ballgame
"Chain of title" means being able to show, document by document, how your company came to legally own its intellectual property. For a software company, that means the code. For a consumer brand, that means the name, logo, and any related trademarks. Buyers do not take your word for it that you own these things. They want the paper trail.
The most common gap is code written before the company owned the rights to claim it. If a founder wrote the first version of your product before incorporating, and never formally assigned that code to the company after incorporation, the company's ownership of its own core product can be legally incomplete. The fix, an assignment agreement between the founder and the entity, is simple to execute and easy to forget. Buyers will ask for it by name.
The same logic applies to your brand. If your company operates under a name that was never trademarked, or if the trademark was filed by an individual rather than the business entity, that mismatch will surface in diligence. It is worth understanding the difference between the two kinds of protection before a deal is on the table. See Trademark vs. Business Name Registration: Key Differences for how those overlap and where they do not.
Contractor and Employee Assignments
This is the single most common finding in IP due diligence, and it deserves attention on its own well before a buyer asks about it. Under copyright law, the person who writes code or creates a work generally owns it, unless there is a written agreement saying otherwise or the person is an employee acting within the scope of their job. Contractors do not automatically transfer ownership to the company that paid them, no matter how clearly everyone understood the arrangement at the time.
Sellers routinely discover, during buyer diligence, that a contractor who built an early version of the platform never signed an assignment agreement. If that contractor cannot be located, or is no longer cooperative, the buyer may require the deal to escrow part of the purchase price, or may walk away from that portion of the IP entirely. We covered this dynamic in detail in Who Owns the Code Your Contractor Wrote?, and it is worth reviewing that piece and auditing your own contractor files against it before you go to market.
Employees present a related but distinct issue. Most employment agreements include an IP assignment clause covering work created within the scope of employment, but older agreements, or informal arrangements with early hires, sometimes lack one. If a key employee contributed core code or design work under an agreement that never addressed IP ownership, a buyer's counsel will flag it, and the fix after the fact, asking a departed employee to sign something, is far harder than getting it right the first time.
Open-Source Exposure
Almost every modern software product incorporates open-source components, and that is not itself a problem. The problem is that different open-source licenses impose different obligations, and some of them are incompatible with a company keeping its own code proprietary. A buyer's technical diligence team will typically run a scan of your codebase to identify every open-source dependency and flag any license with copyleft terms, meaning license terms that can require you to release your own modifications or even your surrounding code under the same open license.
If your company has never done this kind of internal audit, do one before a buyer does. Finding a licensing conflict yourself, and either replacing the component or documenting why the risk is acceptable, is a manageable problem. Having a buyer's engineers find it first, mid-negotiation, tends to reopen the valuation conversation at a bad moment. Our post on Open Source Software Risk: Navigating Licenses to Avoid IP Infringement Claims walks through how these licenses work and what to look for.
Registrations That Lapsed
Trademark and patent registrations require periodic maintenance. Trademarks need renewal filings and, in the United States, periodic proof of continued use. Patents require maintenance fee payments on a set schedule. Companies that registered a mark or a patent years ago and then never diaried the renewal deadlines sometimes discover, only when a buyer's counsel runs a status check, that the registration lapsed months or years earlier.
A lapsed trademark does not necessarily mean you lose all rights to the name. Common law trademark rights, based on actual use in commerce, can still exist. But a lapsed federal registration weakens your legal position, complicates the buyer's ability to rely on it going forward, and it is the kind of finding that makes a buyer ask what else has been neglected. Before a sale process starts, pull the actual registration records for every mark and patent your company claims to own and confirm the status directly, rather than assuming your internal records are current.
What This Means for Timing
None of these problems are fatal on their own, and buyers see them often enough that a well-documented fix rarely kills a deal. What kills leverage is discovering these gaps for the first time during a compressed diligence window, when a fix takes weeks and the buyer's exclusivity period runs out in days. The seller's advantage is time. Doing this work before you engage a buyer, ideally before you even sign a letter of intent, turns a diligence finding into a non-issue.
Our Intellectual Property practice works with founders and business owners on exactly this kind of pre-sale cleanup, from tracking down old contractor assignments to running the registration audits described above. If a sale is on the horizon, even an informal one, it is worth a conversation before the letter of intent is signed rather than after.