IP Due Diligence for Startups

Answer the IP questions with confidence

Investors want to know about IP in a startup. The existence of high-value IP goes to the core of the value proposition, and the ability of the venture to maintain a competitive advantage. Ownership and proper handling of IP is also key.

Have you ever watched Shark Tank or Dragon’s Den? Flowing lively conversation, then the bombshell drops..

“So what’s the IP situation?”

Now come the expectant gazes and halting attempts at a coherent reply. All edited for maximum awkwardness.

As a startup founder, you must be confident answering the familiar and recurring IP question.

This is often the extent of IP Due Diligence for a startup — but it can make or break an investment deal.

IP Due Diligence at enterprise level is a lot more involved, and may for example be preparatory for a strategic M&A deal.

At the startup stage, an investor is simply kicking the tyres to see that the basics are in place, and there are no fatal mistakes.

Every investor has their own view of the importance of IP. The reality though if you get it wrong there can be serious problems later.

The Real Question

The apparent informality of the IP question can invite a casual answer.

There are really two questions in one—
1. Can you tell me about your IP?
2. Do you own your IP?

You should be able to answer both clearly, concisely but also comprehensively.

There are invariably competing issues from an investor perspective. But savvy investors want to know that the IP is in order, and the venture won’t fail just because this area was never properly addressed.

First — what’s the IP?

Assuming you’re an online service this might be proprietary algorithm or technology (uggh, ‘secret sauce’ — hate that term). You might be protecting this as Confidential Information, or be ‘patent pending’.

For a product or consumer offering especially, branding protection or design protection (or at least clearance) might be the more critical concern.

Second — who owns the IP?

This question is really vital. Nothing will sink a startup faster than being shut off from mission critical IP. A viable business can innovate to generate more IP if needed, but being locked out of critical IP can spell disaster.

Ideally, the founders has assigned any IP they have contributed into the startup. An assignment deed and a patent filing can formalise this step, to make things abundantly clear.

Final words from Guy Kawlowski

On a closing note, Guy Kawlowski, noted entrepreneur has this to say on how IP should be handled at the early stages —

"A startup should unequivocally own or unequivocally have licensed its intellectual property. This means that there are no lawsuits, or any risk of lawsuits, by former employers and no charges that the intellectual property infringes on someone’s patents. Also, the intellectual property and licenses should belong to the startup, not the founders. This is because you never want a situation where a disgruntled founder leaves the startup and takes the intellectual property with him—crippling the startup"

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