Khaled Azar 
We were three weeks from closing a $4.2 million acquisition of a SaaS company. The product was strong, churn was low, the buyer was eager. Then due diligence uncovered a single line in a contractor agreement: the lead developer who built the core platform never assigned his IP rights to the company. The buyer walked. Not because the product was bad. Because the seller could not prove they owned it.
Intellectual property issues kill more tech deals than most founders realize. According to a 2023 WIPO report, intangible assets now account for over 90% of the S&P 500’s total market value. In the lower middle market, IP is often the entire reason a buyer shows up. If you cannot prove clean ownership, assignment chains, and freedom from encumbrances, your deal is at risk before the LOI ink dries.
The Four IP Traps That Kill Deals
These are not theoretical risks. We see them on real term sheets, in real due diligence rooms.
After advising on over 100 tech transactions, I have watched the same four IP problems surface again and again. Each one can reduce your valuation, delay your closing, or collapse the deal entirely.
1. Contractor IP ownership gaps. This is the most common and the most dangerous. Under U.S. copyright law, if a contractor writes code for your company, they own it by default unless there is a written assignment. A “work made for hire” clause only applies to specific categories, and software often does not qualify. If your early-stage developers were 1099 contractors and you never executed IP assignment agreements, a buyer’s attorney will flag it immediately. We had a deal where the founder had to track down a developer in another country, six years after the engagement, to get a retroactive assignment signed. It cost $40,000 in legal fees and delayed closing by two months.
2. Open source license contamination. Most modern software uses open source components. That is fine. What is not fine is failing to track which licenses apply to your codebase. Copyleft licenses like GPL and AGPL require that derivative works be released under the same license. If your proprietary product contains GPL-licensed code woven into the core, a buyer may conclude that your entire codebase has disclosure obligations. We have seen buyers reduce offers by 15-25% when the open source audit turns up unresolved copyleft exposure.
3. Missing or weak patent protection. Patents are not essential for every tech company, but if you claim proprietary technology as a differentiator, buyers will ask what protects it. Trade secrets work only if you can demonstrate you actually treated them as secrets: NDAs, access controls, documentation of confidential processes. If your “secret sauce” is just an algorithm that three former employees took with them to competitors, it is worth zero in due diligence.
4. Unresolved IP disputes or infringement claims. Even a frivolous cease-and-desist letter sitting in your inbox creates a contingent liability. Buyers price risk aggressively. An unresolved patent troll claim that might cost $50,000 to settle can reduce your purchase price by $200,000 or more because the buyer factors in litigation risk, distraction cost, and worst-case outcomes.
IP problems rarely kill deals on day one. They surface in week three of due diligence, when the buyer has leverage and you have no time to fix them.
What Buyers Actually Check During IP Due Diligence
The checklist is longer than most founders expect.
A serious buyer’s legal team will request a full IP schedule within the first week of due diligence. Here is what they are looking for:
- Complete chain of title — every piece of code, design, and content must trace back to the company through employment agreements, contractor assignments, or proper licensing.
- Open source bill of materials — a full inventory of every open source component, its license type, and how it integrates with proprietary code. Tools like Black Duck and FOSSA automate this, but many sellers have never run a scan.
- Patent and trademark registrations — current status, jurisdiction coverage, and remaining life. Expired or lapsed registrations signal neglect.
- Trade secret protections — documented policies, employee/contractor NDAs, access logs. If you call something a trade secret but everyone in the company can access it on a shared drive, it does not qualify.
- Pending or historical IP disputes — lawsuits, cease-and-desist letters, DMCA takedowns, domain disputes. Everything.
- Employee invention assignment agreements — especially for technical staff. In states like California, employees can carve out pre-existing inventions. Buyers want to confirm those carve-outs do not overlap with company products.
In most SaaS and software acquisitions, intellectual property and intangible assets represent the vast majority of what the buyer is actually purchasing.
If you cannot produce a clean IP schedule with documentation for every item, expect the buyer to either re-trade the price or walk.
How to Fix Your IP Before Going to Market
The good news: most IP issues are fixable. The bad news: they take time. Start 12 to 18 months before you plan to sell.
Run an IP audit. Catalog every piece of intellectual property your company owns or uses. Software, brand assets, domain names, patents, trade secrets, customer data processes. Identify gaps in ownership documentation. This is the single highest-ROI pre-sale activity for tech companies, and most founders skip it.
Get retroactive assignments. Track down every contractor and former employee who contributed to your product without signing an IP assignment. Yes, it is awkward. Yes, it costs money. But a $5,000 retroactive assignment is infinitely cheaper than a $500,000 valuation haircut. In our experience, most people will sign for a nominal fee if you approach them professionally.
Run an open source scan. Use automated tools to audit your codebase for open source components. Document everything. Replace or isolate any copyleft-licensed components that create risk. A clean software bill of materials is becoming a standard due diligence deliverable, not an optional extra.
Formalize trade secret protections. If your competitive advantage relies on proprietary processes, algorithms, or data, make sure they are actually protected. That means written policies, restricted access, employee training, and documentation. A trade secret you do not protect is just information.
Resolve disputes. Settle any outstanding IP claims before going to market. Even if you believe a claim is baseless, an open dispute creates uncertainty that buyers will price against you. The cost of settlement before a sale is almost always less than the valuation discount during one.
For a complete due diligence preparation guide, including IP and legal readiness, see our walkthrough for tech sellers. You can also use our Legal Due Diligence Audit Kit to get organized before buyers start asking questions.
If you built your product on top of a platform like Salesforce, Shopify, or AWS, review those platform agreements carefully. Some include IP clauses that restrict what you can transfer in a sale. Buyers will ask about platform dependencies, and you need clear answers.
Frequently Asked Questions
What happens if a contractor owns IP used in my product?
If a contractor never signed an IP assignment agreement, they may legally own the code they wrote for you. You will need to obtain a retroactive assignment before closing. Most buyers will not proceed without clean chain of title for all core technology assets.
Can open source code in my product kill an M&A deal?
It depends on the license type. Permissive licenses like MIT and Apache are generally fine. Copyleft licenses like GPL and AGPL can create obligations to disclose your proprietary source code. Unresolved copyleft exposure has caused buyers to reduce offers by 15-25% or walk entirely.
How long before a sale should I start an IP audit?
Start 12 to 18 months before you plan to go to market. Retroactive IP assignments, open source remediation, and trade secret formalization all take time. Rushing these during due diligence gives buyers leverage to renegotiate your price.
Do I need patents to sell my tech company?
No. Many successful tech acquisitions involve companies with no patents. What matters is that you can prove ownership and protection of your core technology, whether through patents, trade secrets, or copyright. The key is documentation and defensibility.
Next Steps
Your IP is either your strongest asset or your biggest liability. Find out which before a buyer does.
We will evaluate your IP position, identify gaps in ownership documentation, and build a remediation plan so your technology holds up under buyer scrutiny.