IP Due Diligence: What Investors Look For

You've built something real. The technology works, customers are interested, and you're ready to raise capital -- whether that's angel funding, venture capital, or positioning for an acquisition. What happens next will involve lawyers, and not just yours. The investor's lawyers are going to look under every hood, and your intellectual property will be one of the first things they examine.

I've been on both sides of IP due diligence -- as in-house counsel at IBM evaluating technology for over twelve years, and as outside counsel helping inventors prepare for investor scrutiny. The companies that have their IP house in order close deals faster. The ones that don't either face painful delays, renegotiated terms, or walk-aways.

What Investors Actually Check

Due diligence isn't a casual review. It's systematic, and experienced investors have seen enough deals to know exactly where problems hide. Here's what they're looking at:

1. Ownership. This is the threshold question. Does the company actually own the intellectual property it claims to own? Are all inventor assignments properly executed and recorded with the USPTO? If a founder invented the technology, has it been formally assigned to the company? You'd be surprised how often the answer is no.
2. Freedom to operate. Owning a patent doesn't mean you're free to practice the invention. Someone else might hold a patent that your product infringes. Investors want to know whether you've analyzed the landscape and whether there are potential blocking patents out there.
3. Patent strength. Not all patents are created equal. Investors -- or more precisely, their patent counsel -- will read your claims. Are they broad enough to be meaningful? Are they narrow enough to survive a validity challenge? A patent with strong, well-drafted independent claims is worth far more than one with claims that can be easily designed around.
4. Coverage gaps. Smart investors think about what you haven't patented. Are there obvious improvements or variations that a competitor could patent, effectively building a fence around your technology? A single patent is rarely enough. A thoughtful portfolio that covers the core invention and its logical extensions tells investors you're thinking strategically.
5. Prosecution history. Everything you said to the patent examiner during prosecution is on the public record. Investors' counsel will read the file history looking for admissions or arguments that could limit your patent's scope in litigation. Statements made to distinguish prior art can come back to narrow your claims through prosecution history estoppel.
6. Maintenance. Are all maintenance fees current? Has anything lapsed? A lapsed patent or abandoned application tells an investor that IP management hasn't been a priority. It's a small thing to fix, but it raises questions about what else might have fallen through the cracks.

The Assignment Chain Problem

This is the number one issue I encounter, and it's almost always fixable -- but only if you catch it before due diligence starts.

Here's the typical scenario. Two founders develop technology together. They file a patent application listing themselves as inventors. Later, they form an LLC or corporation. They raise some initial funding, hire employees, keep building. But they never formally assign the patent from themselves personally to the company.

From a legal standpoint, the founders -- not the company -- still own that patent. The company the investor is putting money into doesn't actually own its core technology. That's a dealbreaker. Not a red flag. A dealbreaker.

The fix is a proper assignment document recorded with the USPTO. It's straightforward, but it needs to be done correctly. And if one of the original founders has since left the company on bad terms, getting that assignment signed becomes considerably more complicated and expensive.

Employee and Contractor Agreements

Every person who touches your technology -- employees, contractors, consultants, interns -- needs a signed invention assignment agreement. This document ensures that anything they create in the course of their work belongs to the company, not to them personally.

Without these agreements, a former contractor could arguably claim ownership of code they wrote, designs they created, or inventions they contributed to. Investors know this, and they'll ask for copies of these agreements during diligence. Missing agreements for key contributors will raise serious concerns.

How to Prepare

The best time to get your IP house in order is six to twelve months before you start fundraising. That gives you time to fix problems without the pressure of an active deal.

Start with an IP audit. A thorough audit covers:

• Inventory of all patents, applications, trademarks, copyrights, and trade secrets
• Verification that all assignments are executed and recorded
• Confirmation that all maintenance fees are current
• Review of employee and contractor invention agreements
• Assessment of patent claim strength and coverage
• Identification of gaps that should be addressed with additional filings

Freedom-to-Operate Analysis

A freedom-to-operate analysis examines whether your product or technology might infringe third-party patents. It's not the same as a patentability search -- that looks at whether your invention is new. FTO looks at whether you're stepping on someone else's rights.

These analyses aren't cheap. Depending on the technology and the complexity of the patent landscape, a thorough FTO study can cost several thousand dollars or more. But consider the alternative: an investor's counsel discovers a potential infringement issue during diligence, and suddenly you're explaining why you didn't know about it. That's a much more expensive conversation.

The Hudson Valley Angle

The startup ecosystem in the Hudson Valley has grown considerably in recent years. More companies in this region are seeking outside investment, whether from New York City-based VCs looking north or from angel investors in the local business community. That growth is encouraging, but it also means more founders are encountering the due diligence process for the first time.

If you're building a technology company in this area and investment is part of your plan, treat your IP portfolio as what it is: one of your most valuable assets. Get it organized early. Fix the gaps before someone else finds them. The founders who do this work upfront negotiate from a position of strength. The ones who don't find themselves scrambling during the most critical phase of their fundraise.