One of the most expensive assumptions a founder can make is simple:

“We paid for it, so we own it.”

Unfortunately, that is not always true.

When a buyer or investor begins due diligence, believing that your company owns its intellectual property is not enough. You need documentation that proves it.

When One Question Stops Everything

Our firm represented a technology company that had raised millions of dollars.

The technology worked. Investors believed in the vision. The company was preparing to raise another round of capital because it needed additional funding to continue growing.

Then an issue arose involving one of the co-founders.

That issue raised questions about whether the company actually owned all of its intellectual property.

Suddenly, the financing process slowed dramatically.

There were questions about invention assignment agreements. Questions about signatures. Questions about whether work developed over the years had actually been assigned to the company.

The founder’s response was completely understandable:

“But we paid for all of it.”

He trusted the people involved and believed everyone had acted in good faith. But buyers and investors do not rely on assumptions. They rely on documentation.

Everyone was left trying to answer one fundamental question:

Does the company actually own its most valuable asset?

What Sophisticated Buyers Want to Know

A sophisticated buyer will not stop at asking who wrote the software or created the technology.

The buyer may also ask:

• Who created it?
• Was that person an employee or an independent contractor?
• Is there a signed invention assignment agreement?
• Is there valid work-for-hire language?
• Can the company prove ownership today?

Depending on the circumstances, paying someone to develop intellectual property may not be enough to establish that the company owns it.

If ownership is uncertain, the value of the asset (and potentially the value of the business) may also become uncertain.

You cannot sell what you do not own.

Surprises Become Expensive During Due Diligence

One of the biggest surprises founders experience during due diligence is discovering that the asset they consider most valuable is not as well protected as they believed.

That discovery can delay a transaction or financing process while agreements, signatures, and years of work are reviewed. It can also create uncertainty at the exact moment you need a buyer or investor to feel confident.

If you are considering selling your business or raising capital, do not wait for someone else to discover the gaps.

A practical review may include identifying the intellectual property your company depends on, determining who helped create it, and confirming that the company has the documentation needed to establish ownership.

The earlier you identify a problem, the more time you have to address it before a transaction is underway.

Catch up on our Through the Buyer’s Eyes series.

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The information provided in this article is for informational purposes only and does not constitute legal advice. No attorney-client relationship is formed by virtue of this article. For specific legal advice related to your situation, please consult with a qualified attorney.