When a company acquires a startup, the most valuable assets on the table are usually intangible. Software, brand identity, patents, proprietary algorithms, and trade secrets often represent the core of what makes a startup worth acquiring in the first place. The assumption that goes into almost every acquisition is that the startup owns these assets. That assumption is frequently wrong — and the consequences of discovering the error after closing can be severe. IP assignment failures are one of the most common and most costly problems that surface during startup due diligence, and they are also among the most preventable.

Founders Never Assigned IP to the Company

Many startups begin before the company is formally incorporated. Founders develop software, create branding, design prototypes, and build the foundational systems of the business while working independently — often as sole proprietors or simply as individuals. If those assets were never formally assigned to the company through a written IP assignment agreement, they legally belong to the founders as individuals, not to the business entity.

This gap is extraordinarily common. Founders frequently believe that incorporating the company or contributing assets to it transfers ownership automatically. It does not. In an acquisition, an acquiring company that pays for a startup’s software or brand without a clear assignment agreement may be purchasing rights that do not belong to the company it is acquiring. Post-closing, the founders retain individual ownership and can assert it — creating expensive disputes over assets the acquirer thought it had bought.

Contractors and Freelancers Own the Work They Created

Startups routinely rely on independent contractors — software engineers, designers, marketing consultants, copywriters, and developers — to build core business assets. Under U.S. copyright law, independent contractors generally own the copyright to work they create unless there is a written agreement that either designates the work as “work made for hire” (which applies in limited statutory categories) or explicitly assigns the copyright to the commissioning company.

Payment alone does not transfer ownership. A startup that paid a contractor $50,000 to build its core software platform still does not own the copyright to that software if there was no written assignment. During acquisition due diligence, missing contractor IP agreements are a significant red flag — the acquiring company may be buying a business whose most valuable technology is legally owned by a former freelancer who may now work for a competitor.

Employee Agreements Do Not Properly Cover Inventions

Employees who create intellectual property in the course of employment generally do so within the framework of the employment relationship, and many states presume employer ownership of work created within the scope of employment. But that presumption has limits, and relying on it without a properly drafted invention assignment agreement is a significant risk. Without explicit invention assignment provisions in employment contracts, disputes can arise over whether a specific piece of software, an algorithm, a product design, or internal system was created “within the scope of employment” — a fact-intensive determination that can go either way.

Some states, including California, impose restrictions on the scope of employee invention assignments, carving out inventions developed entirely on the employee’s own time and without company resources. Startup employment agreements that do not account for these state-specific limitations may be partially unenforceable — which surfaces as a title defect in acquisition due diligence.

No Clear Chain of Title

Even when a startup believes it owns its IP, it must be able to prove it. A clear chain of title means there is documented evidence — signed agreements, assignment records, registration certificates — tracing ownership from creation through to the current owner. Unsigned documents, inconsistent records, missing signatures, or gaps in the ownership history make it impossible to establish clean title.

For acquirers, clouded title creates immediate problems. Title insurance may be unavailable. Representations and warranties in the acquisition agreement become harder to make with confidence. Post-closing, third parties who can assert ownership claims — a former contractor, a co-founder, an employee — can challenge the acquirer’s rights to use or commercialize the assets it paid for. Indemnification provisions help, but they do not substitute for a clean chain of title discovered during diligence.

Open-Source Software Compliance Failures

Open-source software is standard in startup development — but the licenses governing open-source components are legally binding, and non-compliance creates real problems. Some open-source licenses (particularly copyleft licenses like the GPL) require that any software incorporating the open-source component must be distributed under the same license and with source code disclosed. If a startup has embedded GPL-licensed components in its proprietary software without complying with those terms, an acquirer may inherit both the compliance failure and its consequences.

Acquisition due diligence should include a software composition analysis — an audit of what open-source components the startup’s codebase uses and what licenses govern them. Non-compliant use of restrictive open-source licenses can significantly affect the value of proprietary technology, and in some cases requires remediation before closing is advisable.

What IP Due Diligence Should Cover

A thorough IP due diligence review for a startup acquisition should cover all of the following:

• Founder IP assignment agreements — signed and dated before or at incorporation
• Contractor and freelancer agreements — confirming written IP assignment or work-made-for-hire designation for all material deliverables
• Employee invention assignment agreements — reviewed for completeness and state-law compliance
• IP registration records — trademarks, patents, and registered copyrights
• Chain of title documentation — tracing ownership of core assets from creation to the present
• Open-source software audit — identifying all third-party components and their license obligations
• Third-party licenses — confirming that any IP licensed from others is transferable to an acquirer

Gaps discovered during diligence are far better than gaps discovered after closing. Most can be remediated — by obtaining retroactive assignments, curing open-source compliance failures, or structuring deal terms to account for the risk — but only if they are found in time.

Revision Legal’s intellectual property attorneys assist both acquirers and startup founders in identifying and resolving IP ownership issues before they affect transactions. If you are preparing for an acquisition or want to clean up IP title issues in your own company, contact Revision Legal to speak with one of our attorneys.