IP Due Diligence: A Critical Step in Investment Rounds

Intellectual property (IP) often represents a substantial portion of a company’s value but also tells investors a lot about how a company executes their business strategy. For investors, ensuring that a company’s IP is both robust and well-protected is crucial to mitigating risks
and safeguarding the value of their investment. This makes IP diligence an essential part of any investment round, whether it involves a startup or an established business.
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Here’s a detailed look at why IP due diligence matters, the key steps involved, and best practices to follow.

Why IP Due Diligence Matters
IP diligence is the process of assessing a company’s intellectual property assets to verify their ownership, protection, and commercial viability. It is crucial during investment rounds for
several reasons:
1. Valuation Accuracy: A company’s IP portfolio significantly impacts its valuation.
Patents, trade marks, design rights, copyrights, and trade secrets often account for a large share of a company’s intangible assets, especially in tech and biotech sectors. It’s therefore critical to know and be able to articulate what IP your company owns.
2. Risk Mitigation: Verifying IP ownership and freedom to operate can prevent costly, time consuming and disruptive disputes or litigation. Undisclosed licensing agreements that may affect your companies freedom to manoeuvre or pending infringement disputes could derail a deal or lead to financial losses.
3. Competitive Advantage: Strong, enforceable IP rights provide a competitive edge, helping to sustain market leadership and justify the investment. Being able to articulate how your IP portfolio - which may otherwise be considered a cost - promotes and enables your competitive advantage is critical.

Key Steps in IP Due Diligence
Investors should conduct a thorough review of a company’s IP assets as part of their diligence process. This typically involves the following steps:
1) IP Strategy:

• Confirm the existence of a business strategy-aligned IP strategy.
• Review IP strategy and confirm fitness-for-purpose.

2) Inventory of IP Assets:

• Identify all IP assets, including patents, trade marks, design rights, copyrights, trade secrets, domain names, and proprietary software.
• Assess what additional IP assets may be owned by the company that have not yet been identified, such as know-how.
• Review IP documentation for accuracy and completeness.
• If not already available, prepare an IP register clearly identifying all the IP assets identified.

3) Ownership Verification:

• Confirm that the company owns the IP assets it believes it owns and has clear title to them.
• Check for any third-party claims, joint ownership issues, or unresolved assignments.
• Resolve any ownership issues identified as far as possible.

4) IP Processes and Practices:

• Review IP policy, IP-related business conduct statements and other related company policies.
• Assess IP decision making frameworks and consistency of use across the company.
• Examine the company’s IP filing and maintenance practices, including that employed for pending patents, design and trade mark applications.
• Verify the existence of confidentiality agreements and measures to protect trade secrets.

5) IP Risk Management and Freedom to Operate (FTO):

• Assess the company’s IP risk management processes and compliance.
• Confirm availability of clear IP risk ownership and decision making responsibilities.
• Review whether products or services infringe on third-party IP rights.
• If otherwise not available, conduct FTO analysis to identify potential risks in key markets.

6) IP Commercialisation:

• Evaluate licensing agreements, collaborations, or partnerships involving IP.
• Ensure that any IP licensed from third parties is clearly defined and enforceable.
• Identify other potential routes to leveraging the IP portfolio.
• Qualify and quantify the value generated from existing IP commercialisation.

7) IP Talent:

• Confirm company access to appropriately qualified IP talent, be it internally or externally sourced.

8) IP Metrics:

• Prepare IP metrics to present as a part of diligence to demonstrate IP growth, utility, strength and alignment to current or planned product or service launch.

Finally, after having gone to the effort of the above diligence, you need to be able to transfer the knowledge to investors. Articulating your IP position, highlighting the strengths of your portfolio and demonstrating your IP capabilities in a well reasoned, easy to follow, engaging report is essential to successfully landing your IP message.