Lessons in due diligence: Start-ups must get their IP house in order

Lessons in due diligence: Start-ups must get their IP house in order

Madison, Wis. – In my last column, I talked about the due diligence process in relatively general terms. I explained why a bit of work now will save time, headaches and money later, when you’re trying to get money from investors or trying to sell your company. So this time, let’s start to take a closer look at some of the work you can do from the very beginning.
As I said last time, if this column raises any questions for you about your own company or technology, I encourage you to work with your advisers (accountants, bankers and lawyers, in particular) to fix the problem sooner rather than later.
Intellectual property
For most technology companies, intellectual property is their most critical asset. Whether it is a full-blown, developed invention or just a bright idea, it can be worth millions…but only if handled the right way. Taking a look at some of the in-depth questions you will be asked to answer through the due diligence process is a great way to define what you should be working on now.
The usual suspects
Most of the “typical” questions related to your intellectual property are likely already on your radar screen. You’ve heard over and again the need to retain competent patent counsel to help you secure patents, competent license counsel to ensure your license agreements adequately protect you, and other competent advisors to make sure you produce and preserve the best IP possible. Through the due diligence process, you will be asked questions that are designed to figure out if you did so:

  • Identify by country and provide copies of all patents, patent applications, trademarks (registered and common law, including pending applications) and copyrights.
  • List and describe all applicable trade secrets and know-how.
  • Identify the subject matter and provide copies of all opinions of counsel relating to any patent, patent application, invention, product, process, patent right, copyright, license, trademark, service mark, trade name, slogan or logo, including without limitation patentability or registerability, right to use, prior art, infringement, validity, unenforceability or the like.
  • Provide a list of patents (U.S. and foreign) that have been studied to determine whether any existing or contemplated product or process might infringe.
  • Provide a list a copies of all contracts, licenses and agreements granting you any right, title or privilege under the intellectual property (e.g. patents, technology, trade secrets, trademarks, service marks, trade dress, trade names, copyrights, rights of publicity, etc.) of any third party.
  • Provide a list of all names, slogans and marks used in connection with the business. In those instances where registration has not been sought, identify the name, slogan and/or mark, and its date of first use anywhere in the United States.
  • Provide a list of all Internet domain names and URLs associated with the business.
  • Provide a list and copies of all confidentiality agreements relating to the business.

This is just a sampling of the types of questions you will be asked, but you can see how having the right counsel and the right documents and agreements in place will make this process relatively straightforward. With any luck, the answers to these questions will be “easy.”
The ones you might not have fully considered
What might be even more important are the more detailed questions that begin to drill down into the development and security of your intellectual property. Let’s take a look at some questions that are likely, in almost all cases, to require long answers to short questions:

  • Describe and provide documentation of the manner in which you received and/or developed the underlying concepts for the technology you use in your business.
  • Provide copies of all agreements providing for services of an independent contractor or consultant that relate your company’s technology.
  • Identify all individuals and companies who contributed in any manner to your technology and provide copies of all agreements with such individuals and companies.

Imagine answering that first question about how you developed your technology. Do you have any concern at all as you begin to describe where you were when you developed the technology (might it have been in your former employer’s lab?), with whom you collaborated on the technology, whose technology was the impetus for your research, or when you first described the invention to anyone else? Are you certain that you have secured all rights to every detail of your technology?
Now, imagine providing copies of all independent contractor agreements. Will you be confident that those agreements transferred all rights in their work to you and your company? Within this question lies an area that I have seen overlooked at times: database development. Are you certain you have all rights to the database that handles the raw data for your technology?
Finally, you love your company and technology. You love to talk about your technology. You know that talking about your technology with others can help you fully develop it. Are you certain that no one with whom you spoke could claim any right to any piece of your technology? Will you unequivocally represent and warrant over any such claims? That is, if someone else claims a right in your technology, will you pay the purchaser or investor for any damages it might incur?
Nothing’s ever easy
As you can see, the due diligence process is not simply a process of listing everything you own or providing a list of your patents. You will be asked detailed questions about your intellectual property. You should keep these questions in mind as you move through the development of your company.
We’ll spend a bit more time on due diligence in our next column, too, looking beyond intellectual property.

Sverre Roang heads the Corporate Transactions and Business Acquisitions Practice at the Madison office of Whyte Hirschboeck Dudek. Roang, the team leader of the firm’s Emerging & Entrepreneurial Companies Team, earned his law degree from UW-Madison and currently serves as an adjunct professor at the UW Law School. He may be reached at sroang@whdlaw.com or 608-234-6079.
The opinions expressed herein or statements made in the above column are solely those of the author, and do not necessarily reflect the views of Wisconsin Technology Network, LLC. WTN accepts no legal liability or responsibility for any claims made or opinions expressed herein.