Technical diligence confirms that everyone who wrote the product assigned their rights to the company, and that open-source components are used in ways their licences allow.
10 min read · Level 3
An IP assignment is one of the cheapest documents in company building and one of the most expensive to obtain late. I think a missing one discovered in diligence is good news of a kind: it is the moment when fixing it costs a signature rather than a negotiation.
Two questions about the code:
1. Does the company own what was built?
In many jurisdictions, work by contractors or by founders before the company existed may not automatically belong to the company. Ownership usually requires written assignment.
Contributor Check Founders assignment of pre-incorporation work Employees employment agreements with IP assignment Contractors and agencies contracts with explicit IP assignment University or previous employer claims on work done using their time or resources
2. Are open-source licences respected?
Most products use open-source software. Licences differ:
Licence type Examples Typical obligation Permissive MIT, Apache 2.0 keep notices; few restrictions Copyleft GPL distributing modified versions may require sharing source code Network copyleft AGPL obligations can apply when software is offered over a network
Automated scanning tools can list components and licences. Specialist legal advice is needed where copyleft code is embedded in a commercial product.
Because a company that does not own its core code may not be able to sell it, license it, defend it or be acquired cleanly. Acquirers check this carefully, and gaps can delay or kill an exit.
Most gaps are fixable before investment - for example by obtaining signed assignments - but much harder afterwards.
This is educational information, not legal advice. Rules differ by country and change — get advice from a qualified professional in your jurisdiction before acting.
Educational, not personalised financial advice. Nothing in the Investor Academy is a recommendation to buy, sell or hold anything — what is right for you depends on your own circumstances and the rules where you live.
Sources: Open Source Initiative - Licenses; U.S. Copyright Office - Works made for hire; UK Intellectual Property Office
Diligence finds an ownership gap.
Core product first built by an outside agency yes Agency contract includes IP assignment no Agency still in business yes
The investor makes a signed IP assignment from the agency a condition of investing. The agency agrees for a small fee. Had this surfaced during an acquisition three years later, the agency's negotiating position - and the cost - would have been much stronger.
Assuming the company owns everything its team built, or ignoring open-source licences because the software was free to download.
Include founders, employees, contractors and agencies.
Confirm written assignment for each contributor.
Identify components and their licences.
Make missing assignments or licence remediation a condition of investment.
During diligence on any company whose value depends on its software or technology.
Do not rely on this lesson for a legal conclusion; involve a qualified lawyer where ownership or licence obligations are unclear.
Software composition analysis providers and acquisition advisers regularly report that audits of commercial codebases during mergers and acquisitions find open-source components with licence conflicts or missing notices in a large share of audited applications.
Licence issues are common; the risk lies in not knowing about them before a transaction.
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