The Hidden Costs of Skipping IP Due Diligence in Tech M&A

Introduction: Why IP Due Diligence Matters in Tech M&A

In technology M&A, intellectual property (IP) is often the most valuable asset being acquired. Yet, many startups and acquirers treat IP due diligence as an afterthought which can delay closings, reduce valuations, or kill deals entirely.

Picture this: You’ve spent months negotiating with a startup acquisition target. The letter of intent is signed, due diligence begins, and your legal team discovers that the company’s founding CTO never signed over his IP rights. The CTO's refuses to cooperate, and threatens to derail the entire transaction.

This scenario happens more often than you’d think in Silicon Valley M&A deals, where IP is often the backbone of enterprise value.

When IP Issues Derail Tech M&A Transactions

Skipping or rushing IP due diligence can cause expensive problems after the term sheet is signed.

Common issues include:

• Renegotiated purchase prices once IP ownership problems are uncovered.
• Weak or incomplete codebases that fail technical or legal review.
• Missing assignment agreements that create uncertainty around who owns core technology.

A frequent issue involves missing Proprietary Information and Invention Assignment Agreements (PIIAAs).

Without a signed PIIAA, a founder may claim ownership of key IP assets they developed before or during employment. If that founder left on bad terms, this dispute can stall or even sink the acquisition.

The Modern IP Minefield for Startups

Today’s startups have IP portfolios that go far beyond patents or trademarks.

Modern intellectual property includes:

• Source code and software frameworks
• Databases and data models
• Marketing assets (logos, taglines, branded hashtags)
• Online publications and social media content

Missing or misunderstanding any of these can create significant blind spots in a tech acquisition.



Another common risk is open-source compliance. Acquirers must evaluate all open-source components and licenses in a target’s codebase. If neglected, buyers can inherit restrictive licenses that limit how they can use or distribute the acquired technology — a costly oversight in post-merger integration.

Red Flags in the Data Room

During M&A due diligence, experienced buyers know to look for:

• Cease-and-desist letters or pending IP disputes
• Jointly owned IP with contractors or universities
• Missing IP schedules or undocumented software rights
• Problematic license clauses in vendor or funding agreements



Partnerships with universities or government agencies can also complicate ownership. Some grants or R&D contracts give third parties partial IP rights, which must be reviewed carefully before closing.

How to Protect Against IP Risks in M&A

Both buyers and sellers can take proactive steps to minimize risk and protect deal value:

For Sellers:

• Conduct an internal IP audit before going to market.
• Ensure all IP assignment agreements and registrations are current.
• Identify and resolve open-source compliance issues early.
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For Buyers:

• Confirm ownership of all key IP assets before closing.
• Negotiate strong representations and warranties in the purchase agreement.
• Review IP schedules in disclosure documents carefully.
• Develop a post-acquisition plan for IP integration and protection.



In short, IP due diligence protects buyers from overpaying and helps sellers present a clean, defensible IP portfolio.

The Bottom Line

In today’s tech-driven M&A market, intellectual property due diligence is foundational. Thorough IP diligence confirms the assets being acquired, reduces exposure to future disputes, and builds trust between both sides of the transaction. In deals where IP represents the bulk of a company’s value, skipping this process can be a multimillion-dollar mistake.

Read next: Are You Due Diligence Ready? A Founder’s Essential Guide

Disclaimer: This article is for informational purposes only and does not constitute legal advice. For personalized legal guidance, please consult a qualified attorney.