Due Diligence Essentials
Getting Your IP House in Order Before the Questions Begin
Due diligence is where your IP strategy is no longer theoretical—it’s tested. Whether you’re closing a venture round, preparing for an acquisition, or entering a strategic partnership, the diligence process is where investors and partners assess whether your intellectual property is as solid, valuable, and risk-free as you’ve represented.
It’s also where gaps are exposed. Unassigned inventions, unclear title, or ill-timed disclosures can delay deals, reduce valuation, or derail transactions altogether. Founders who prepare for diligence early—before the term sheet, before the data room—are better positioned to move quickly, avoid surprises, and instill confidence.
At Schmeiser Olsen, we routinely help startups and their counsel prepare IP portfolios for diligence review. Below are the core areas every founder should understand and anticipate.
Clean IP Ownership: The Foundation of Diligence
The most fundamental diligence question is whether the company owns the intellectual property it claims to. This starts with documentation.
Ownership must be clear, chain of title must be complete, and every contributor—whether founder, employee, contractor, or external collaborator—must have formally assigned their rights to the company. Investors do not assume goodwill or intent; they want executed agreements that eliminate ambiguity.
Where issues often arise:
- Contractors or developers were engaged early without an IP assignment clause.
- Founders worked on the invention at a previous employer but failed to document carve-outs or waivers.
- Internal contributions were never reduced to writing or formally signed over.
These gaps may seem technical, but they raise material legal risk. Founders should review all historical agreements and ensure that every invention, product, or brand asset in use has been properly transferred to the entity.
Key diligence failure point: Missing or incomplete IP assignments from early contributors.
Patent and Trademark Filing Records
Diligence involves more than asking, “Do you have patents?” Investors and acquirers will evaluate the quality, coverage, and relevance of the company’s filings.
This includes:
- A full inventory of pending and granted patent applications, both U.S. and foreign
- Filing dates and priority chains, especially where multiple provisionals or PCTs are involved
- Status of prosecution (e.g., examiner rejections, interviews, or claim amendments)
- The extent to which claims cover the company’s actual products or services
It’s not unusual for investors to bring in outside patent counsel for a focused analysis. A common issue: the company has filed patents, but the claims are narrow, disconnected from core functionality, or copied from academic prototypes. These may not hold up in a competitive market—or in a valuation model.
Equally important are trademarks. Investors want to know that the brand assets—company name, product names, domain names—are secured and not vulnerable to third-party claims. Intent-to-use applications can be enough at early stages, but filings must be timely and supported by genuine use in commerce.
Public Disclosure and Patent Validity
Diligence will also examine whether patent rights have been compromised by premature disclosure. Under U.S. law, public disclosure starts a one-year clock to file a patent application. In most foreign jurisdictions, the window is zero—any disclosure before filing destroys novelty.
Startups often unknowingly cross these lines. Investor pitch decks, demo day presentations, media interviews, or beta test websites may qualify as public disclosures. If those occurred before a filing, and no provisional was in place, rights may be limited or lost.
Founders should be able to articulate:
- When core technology was first publicly disclosed
- When the first patent application was filed
- Whether any foreign filing rights were preserved or forfeited
Where needed, this timeline should be documented. A clean narrative instills trust. A disjointed one prompts scrutiny.
Third-Party Rights and Contractual Restrictions
IP diligence also includes a review of third-party agreements to identify whether any external party has rights—express or implied—over the company’s IP.
Common areas of concern include:
- Joint development agreements with academic labs or strategic partners
- Customer contracts that include unusually broad license terms or co-ownership
- Employment agreements missing IP provisions
- NDAs or informal MOUs with ambiguous language about collaboration
These types of documents, if left unchecked, can introduce encumbrances—restrictions or claims that limit the company’s freedom to operate, commercialize, or transfer its IP in a transaction.
Key diligence failure point: Overly broad IP rights granted in customer, academic, or partner contracts.
Putting It All Together: Building a Diligence-Ready IP File
Strong IP diligence is less about the number of filings and more about the clarity of your position. A well-prepared company can demonstrate:
- Clear and complete IP ownership across all contributors
- Timely and strategic filings that map to product value
- Secure brand assets through trademark registrations
- Freedom from unintentional encumbrances or third-party claims
- A clean disclosure timeline that preserves patent rights
Founders who organize this material proactively gain a meaningful advantage—not just in passing diligence, but in negotiating from a position of strength.
Final Thought
Diligence isn’t the time to build your IP foundation—it’s the time to prove it exists. The more thoroughly and transparently you can demonstrate ownership, coverage, and alignment with your business model, the faster the deal moves—and the more confident your investors will be.
If you’re preparing for a funding round, acquisition, or strategic partnership, Schmeiser Olsen can help audit your IP and prepare your company for a clean diligence process. Contact our team to get started.