📄 How Companies Fail To Protect Their IP

🎉 Happy Friday, funds family!

When and how should a company start thinking about protecting its intellectual property? It's an important question for companies and the capital providers who invest in them — IP can often be the single most valuable asset underlying the business.

The short answer is...

The short answer is...you guessed it: Companies should start protecting their intellectual property from day one. If the company's value is tied to its technology, brand, content, and/or proprietary processes, the IP needs to be properly created, assigned, and protected long before investors come to the table. If it isn't, what the investor thinks it's buying may not actually belong to the company. 😱 

➡️ Why does IP matter so much to investors?

When an investor writes a check into an early-stage company, it is usually investing in one or more of the following:

• Proprietary technology or software.

• A brand and/or trademark.

• Trade secrets or proprietary know-how.

• Content, data, or creative works.

If the company doesn't actually own the foregoing IP, or if ownership is disputed (e.g., versus any persons or entities), the entire basis for the investment is at risk. That's not just a legal technicality, but a critical valuation and an investment issue.

➡️ How companies fail to protect their IP

The most common IP issues we see in early-stage companies are:

• Founders built the technology before incorporating, and never (properly) assigned it to the company.

• Employees, contractors, or freelancers developed key technology without proper IP assignment agreements.

• The company is using open-source software without tracking license obligations.

• Trademarks were never registered or searched for conflicts.

• IP was developed while a founder was still employed somewhere else, creating potential claims from that prior employer.

These are all fixable, but they get more expensive and more complicated to fix the longer they sit. Over time, it can become an actual existential problem, so it is best to ensure these items are taken care of correctly as soon as possible.

➡️ How should an investor diligence IP?

An investor should approach IP diligence to answer one core question: Does the company actually own all the IP it says it owns? That means reviewing:

• Founder IP assignment agreements (especially for anything created pre-incorporation).

• Employee and contractor invention assignment and work-for-hire agreements.

• Open-source software usage and license compliance.

• Trademark filings and any pending or threatened disputes.

• Patent filings (if applicable) and prosecution status.

• Any third-party licenses the company depends on.

• Prior employment agreements of key founders to check for assignment or non-compete carryovers.

If the company can't produce proper and executed documentation on any of these, that's a red flag worth pausing on and addressing right off the bat.

➡️ Why does this matter more as the company scales?

Early on, IP gaps are usually manageable. For instance, a missing assignment can be signed, and a trademark can be filed.

But as the company raises more capital, hires more people, licenses its technology, or heads toward an exit, those gaps become real liabilities. A potential acquirer or later-stage investor will diligence IP thoroughly, and anything unresolved from the early days will either delay the deal, reduce the price, or kill it. Cleaning it up at founding costs almost nothing…and on the other hand, cleaning it up at exit can be a critical, potentially deal-breaking issue.

➡️ The practical takeaway

For the company

1. Assign all pre-incorporation IP to the company at formation, in writing.

2. Use proper invention assignment agreements for every founder, employee, and contractor from day one.

3. Track all open-source usage and maintain a log of license types and obligations.

4. File trademark applications early for the company's core brand and product names.

5. Keep an internal IP register that catalogs patents, trademarks, trade secrets, domain names, and key licenses.

6. Make sure employment agreements include clear IP assignment, confidentiality, and non-compete provisions (to the extent enforceable in the relevant jurisdiction).

For the investor

1. Include IP representations and warranties in the financing documents (ownership, no encumbrances, no infringement, no open-source contamination of proprietary code).

2. Require IP assignment as a closing condition if it hasn't already been done.

3. Build IP diligence into every round, not just the first check.

4. Ask for the open-source log and actually review it.

5. Flag any founder who built technology while employed elsewhere and diligence that prior employer's IP policies.

Thanks for reading, everyone!

Have a great weekend! 🙌

⚠️ Note: This newsletter is for informational purposes only and nothing should be considered legal advice. For that, hire a lawyer! I am a lawyer, but not your lawyer (unless I actually am your lawyer because you’ve signed an engagement letter and we’re working together). This may be considered attorney advertising.