In technology acquisitions, intellectual property often represents the primary asset being purchased. Yet IP-related issues remain among the most common causes of deal failure, valuation disputes, and post-closing litigation. Understanding these pitfalls before entering a transaction can save millions and prevent deals from collapsing during due diligence.

The Contractor IP Assignment Gap

One of the most frequently encountered yet easily preventable IP problems involves incomplete contractor assignments. Many early-stage companies engage contractors, freelancers, or offshore development teams to build their initial product. Without proper IP assignment agreements in place, these contractors may retain ownership rights to the code they developed.

Unlike employees, whose work product generally belongs to the employer under "work made for hire" doctrine, independent contractors retain copyright ownership unless they explicitly assign rights through written agreement. I've seen transactions delayed for months while companies scrambled to obtain retroactive assignments from contractors, some of whom had become difficult to locate or demanded additional payment for the assignment.

The solution is straightforward: implement comprehensive IP assignment agreements with all contractors before they begin work. These agreements should cover all forms of IP including patents, copyrights, trade secrets, and moral rights. For companies already facing this issue, address it immediately rather than waiting until a transaction surfaces the problem.

Open Source Compliance Nightmares

Open source software has become fundamental to modern development, but its use creates complex licensing obligations that many companies fail to track properly. Different open source licenses impose varying requirements, from simple attribution to mandatory disclosure of derivative works and even "copyleft" provisions requiring companies to release their own source code.

During due diligence, sophisticated buyers conduct thorough software composition analysis to identify all open source components and their licenses. Discovery of GPL-licensed code integrated into proprietary software can be devastating. In some cases, it may require complete re-architecture to remove the offending code. In others, it can reduce valuation substantially or kill the deal entirely.

Companies should implement open source compliance programs early, using automated scanning tools to maintain a software bill of materials (SBOM) that tracks all third-party components and their licenses. Establish clear policies about which open source licenses are acceptable for various uses within your products.

Trade Secret Protection Failures

Trade secrets can be extraordinarily valuable, but they lose legal protection if not properly maintained as confidential. Buyers scrutinize whether target companies have implemented reasonable measures to protect trade secret information, including restricted access, confidentiality agreements, and technical security controls.

Common failures include sharing confidential information with partners or customers without NDAs, failing to mark documents as confidential, allowing unrestricted employee access to sensitive information, and inadequate technical controls like encryption or access logging. Once trade secret status is lost, it cannot be recovered.

Implement comprehensive information security programs that include both technical and procedural controls. Use confidentiality agreements with all parties who access sensitive information. Clearly mark confidential documents and train employees on trade secret protection. Document your security measures so you can demonstrate to buyers that you've taken reasonable steps to maintain confidentiality.

Patent Ownership Ambiguities

Patent ownership can become surprisingly murky, particularly when inventions were developed jointly by employees and consultants, when founders contributed IP developed partially during prior employment, or when academic researchers were involved. Chain of title issues can render patents unenforceable or create co-ownership situations that dramatically reduce patent value.

Universities often retain rights to inventions developed by faculty or students using university resources. Employers typically have rights to employee inventions related to the company's business or developed using company resources. These overlapping claims can create complex ownership disputes that surface during acquisition due diligence.

When filing patent applications, carefully document inventorship and ensure all inventors have assigned rights to the company. Review employment histories of key technical founders to identify potential prior employer claims. If university research contributed to your technology, clarify ownership through formal agreements with the institution.

Encumbered IP Assets

IP assets may be subject to licenses, liens, or other encumbrances that limit their transferability or value. Common issues include exclusive licenses granted to third parties, security interests granted to lenders, joint ownership with partners or co-developers, and government rights arising from federal funding.

Many startups grant overly broad licenses to early customers or strategic partners in exchange for revenue or validation. These licenses can substantially reduce the asset's value to an acquirer, particularly if they're exclusive, perpetual, or transferable. Similarly, venture debt agreements often include IP liens that must be released before closing.

Maintain a comprehensive register of all IP licenses, assignments, liens, and other encumbrances. Before granting significant IP rights to third parties, consider the potential impact on future transactions. Include change of control provisions in license agreements that allow termination upon acquisition.

Inadequate IP Portfolio Documentation

Poor record-keeping can raise red flags even when ownership is clear. Missing assignment documents, incomplete invention disclosures, gaps in patent prosecution files, and unclear development histories all create uncertainty that buyers resolve by reducing valuation or walking away.

Implement systematic processes for documenting IP creation and ownership. Maintain organized files with all assignment agreements, prosecution correspondence, license agreements, and invention disclosures. Create inventor notebooks or other contemporaneous records of development activities. This documentation demonstrates clear chain of title and facilitates smooth due diligence.

Preventive Measures

The best approach to IP pitfalls is prevention through systematic processes implemented from day one. Conduct IP audits annually or before fundraising rounds to identify and correct issues early when they're easier and cheaper to fix. Use standard form agreements for all contractors, employees, and partners that include comprehensive IP assignment provisions.

Implement approval processes for open source usage and maintain current records of all third-party code. Establish trade secret protection programs with appropriate security measures. Document everything related to IP creation, ownership, and prosecution.

When selling a company, begin IP due diligence preparation months before engaging with buyers. This allows time to correct issues, gather documentation, and obtain missing assignments. Proactive preparation not only prevents deal failures but also maximizes valuation by demonstrating that IP assets are clean, well-documented, and fully transferable.