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Technology Investments IP Due Diligence

Investing in a Technology Rich Business – Intellectual Property Due Diligence

When investing in a technology rich business, you will want to understand the Intellectual Property (“IP”) position and steps taken to secure it. This is critical to value/viability. The aim is to make sure the IP is legally owed by the business and secure and free to use, exploit and enforce.

1. What does the Company’s market look like?

Identify what technology space and market the Company operates in. Who are the competitors? What IP rights to they hold that may be barriers to entry? What are the potential opportunities and risks in that technology space?

2. What is the geographical reach of the Company’s operations?

Identify all key countries in which the Company plans to sell/sells goods or services, so that IP rights analysis can be conducted in those territories .

3. Does the Company own patents, trade marks, registered designs?

Obtain details of all registrations and pending applications for registration of IP rights owned or applied for by the Company.

4. What about branding?

Identify all names, logos and branding under which the Company has been trading. Have they been adequately legally protected?

5. It’s important to know what IP rights the Company does not own, but needs for it to trade

Obtain a copy of each licence of IP rights licensed to the Company. Try to understand the benefits and risks of any existing IP licence agreements.

Confirm whether there have been any breaches of licence terms by the Company or the licensor.

Are there licenses needed that are not already in place?

6. Who owns the IP?

Ownership of the technology in terms of its creation e.g. by developers, non-employees, or previous acquisition should be considered. Often it turns out the owner is not the Company in which the investment is to be made and steps need to be taken to remedy this pre-investment.

7. Are trade secrets are adequately secured?

Obtain details of any contracts/ other arrangements, policies and procedures for the secure disclosure of confidential information of the Company (including technical and commercial information and know-how not in the public domain) by (or to) the Company.

8. What is the infringement risk?

Aim to obtain details of any products, processes or services of the Company that are known or suspected to:

—infringe the IP rights of any other party, or

—involve the illegal or unlicensed use of confidential information disclosed to the Company.

Has the Company obtained ‘freedom to operate’ searches and advice in relation to its core technology, to understand the patent space/risk of IP infringement? Has the Company obtained trade mark clearance searches in key country markets for its brands?

Obtain details of any existing or threatened IP infringement claims, actions or proceedings brought by or against the Company.

9. What research and development activities is the Company involved in?

Obtain details of any research, development, assistance, information exchange or other agreements relating to the business activities, ventures or technical skills of the Company. Are those arrangements sound from both a commercial and legal perspective?

10. What about innovations and processes not identified as IP?

Obtain details of any inventions, secret processes, methods of production or designs of the Company that are fundamental to or reasonably likely to have a significant impact on the Company and are not protected as IP rights (other than protection as confidential know-how).

Obtain details of any steps, internal policies, procedures or systems that are being taken to capture such information and obtain IP protection.

11. What consents are needed before an investment can be made that involves  the transfer of existing or the issue of new shares in the Company?

Do any key IP agreements contain rights dependent on “change of control” – is this a risk?

12. What if software is a key technology of the Company?

As mentioned above, ownership of the software in terms of its creation e.g. by developers, non-employees, or previous acquisition should be considered. Ascertain if the Company possesses up to date copies of all the source code for the software. It is also important to ascertain to what extent open source software has been included in the development of the software, which will not be owned by the Company and it may be subject to restrictions on commercial use.
Aim to understand the Company’s go to market model: does the Company licence the copyright in the software to customers i.e. installed software; or does it in fact use a SaaS model that requires the software to be provided as a hosted service to customers, in which case investigate the service levels offered.

13. What consents are needed before an investment can be made that involves the transfer of existing or the issue of new shares in the Company?

Do any key IP agreements contain rights dependent on “change of control” – is this a risk?

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