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IP Due Diligence For Entrepreneurs and Startups

Home / Blog / Intellectual Property (IP) / IP Due Diligence For Entrepreneurs and Startups

Due Diligence is a term that most startups/new businesses have heard much too often from investors or potential partners when it comes to intellectual property. If someone is interested in partnering with or investing in your business, it is very natural for them to conduct Intellectual Property due diligence of your assets and liabilities for reassurance. Therefore, in order to present your company as a viable business, it becomes important to understand this crucial concept. 

Table of Contents

What is IP Due Diligence?

IP due diligence is an investigation conducted into the intangible assets of a business to determine the value of the intellectual property. It analyses the IP of the business along with the scope of protection to determine the risks and potential value of the portfolio.  

What Type of IP Diligence Do You Need?

IP Diligence may be detailed or peripheral depending on the centrality of the IP to your business. If the Intellectual Property is of marginal value in the scheme of things, then a simple validation should suffice. However, if the IP contributes significantly to commercial success, a more thorough investigation is required. In most cases, adopting a mix of the two methods works as a sound strategy for due diligence.  

A key point for start-ups is to evaluate not just the present but the future potential of their business and convey the same to investors.  

When to Consider IP Diligence?

Every company owns Intellectual Property in the form of trademarks, trade secrets, patents etc. IP rights acquire significance when the company is considering licensing deals, business sales, and soliciting investment from outside. Each of these aspects warrants due diligence to be performed effectively. Let’s look at the different scenarios and the importance of IP Due Diligence in each: 

Conducting IP diligence prior to selling or licensing your product helps you as well as the buyer determine the true value of the asset. This allows you to promote your IP better. Besides the benefit to the buyer, IP diligence is advantageous to the seller as well as it helps in exposing any omissions in the IP ownership or usage rights. An awareness of these gaps enables the seller to plug them, thereby strengthening the IP Rights and mitigating future risks and liabilities.  

Besides revealing the correct value of the IP, due diligence allows a buyer the dual benefit of assessing their present IP vis-à-vis the one they intend to buy. Sometimes, this might present the opportunity for cross-licensing that can help save costs.  

Winning the trust of investors is a crucial determinant of your ability to grab their investment. IP Diligence can easily help you do so by presenting your IP in the best light and by confidently managing any investor queries. Due diligence also helps investors check a company’s Freedom to Operate in chief markets as well as the protection of the IP in overriding competition. 

The Basics of Due Diligence

Due diligence is a comprehensive activity covering various aspects. Some of these are:

Every IP is governed by a set of rules and regulations that need to be followed in order to ensure the protection of Intellectual Property.  Things like timely payment of fees, covered and pending rights, lifetime of IP etc. are looked into.  

The geographical areas where the IP is valid is important when looking for wider coverage. It is important to check if the key markets you wish to operate in are protected by the present IP. Options for extending the rights to foreign markets are also covered.  

The validity of the IP Rights as well as their chances of success in case challenged by another business are crucial pointers that due diligence considers. 

 The scope of the IP will determine if it is industrial or copyright property. Due diligence uncovers the scope to understand how secure the patent is and if it covers something commercially useful.  

Steps For IP Due Diligence

IP due diligence involves the following steps: 

  • Establish a special due diligence team and clearly spell out your expectations with the IP management company. 
  • Prepare an IP due diligence checklist.  
  • Segregate IP assets to identify the IP rights or protectable intangible assets on the basis of their pertinence to your transaction.  
  • Conducting a thorough search of the IP ownership. This includes gathering information on any IP rights that may interfere with the sales or usage of these rights in future. Issues like infringement are analysed in this stage. 
  • Scrutinising all information provided by the IP owner to verify the accuracy of the facts. In case of any discrepancy in the information, the seller must be approached with the relevant set of questions.  
  • Validity checks, status checks, claim checks, ownership checks, and conflict checks are conducted to monitor the IP Rights. 
  • Once all the above steps are completed a final report that clearly lists the benefits and risks is generated. 

Conclusion

Intellectual Property due diligence is an excellent tool to understand and evaluate the IP portfolio of any company. It discloses the strengths and weaknesses of their IP Rights. Erroneous due diligence may lead to over-evaluation of the target, and exposure to legal and financial dangers. Therefore, conducting IP due diligence in a structured and in-depth manner is important to ensure you can avoid making catastrophic mistakes later.   

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