The single most common thing to derail due diligence. If contractors built part of it without an assignment, you may not own it.
IP assignment is a signed agreement transferring ownership of work product to the company. It should be signed by every founder, employee and contractor who touches the product.
Employee-created work often vests in the employer by default. Contractor work frequently does not.
Because without it, the company may not own its own product — and that is not a technicality. An investor is buying a company that owns what it sells. If it does not, the deal stops.
This is the most common single cause of due diligence problems in early companies, and it is entirely preventable with an afternoon of paperwork.
A company signs a term sheet. Diligence starts.
The investor asks for IP assignments. The two founders signed theirs at incorporation. But the contractor who built the original prototype eighteen months ago did not — there was a short scope-of-work email and nothing else.
He now works somewhere else. Legally, he may own part of the codebase, including parts still running in production.
What happens next: the company has to find him, explain the situation, and ask him to sign an assignment now. He is under no obligation. He may sign it immediately out of goodwill. He may want paying. He may be unreachable. He may have been told by his current employer not to sign anything.
Meanwhile the round is on hold and the investor is wondering what else was not documented.
Cost of prevention: one signature, eighteen months ago.
First-time founders often assume that paying someone means owning the output. In many jurisdictions it does not for contractors, unless it is written down.
The second mistake: forgetting people who contributed early and informally — a friend who designed the logo, someone who wrote the first landing page, a student who built a prototype. All of them may hold rights.
The third: using code or assets with licences that do not permit commercial use, or copying something from a previous employer. Both surface in a technical diligence review.
Founders, employees, contractors, freelancers, friends who helped. Go back to the very beginning.
Signed, not agreed by email. Email is better than nothing and is not the same thing.
People sign willingly when there is no money on the table. Under deal pressure, positions change.
Standard clause in every employment and contractor contract from now on. No exceptions.
Check that open-source licences permit your commercial use. Some do not.
Code, designs, customer lists. It creates a claim against your company that is very hard to unwind.
Now, and then continuously as part of every engagement.
There is no situation where you should skip this. It is cheap, fast and prevents the most common category of deal-blocking problem.
This is educational information, not legal advice. Rules differ by country and change — get advice from a qualified professional in your jurisdiction before acting.
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