7 ways to ensure your tech startup is due diligence ready
Fiona Stevens, partner and patent attorney at Gill Jennings & Every details how innovative businesses need to make sure they are due diligence ready when looking for investment.
The importance of due diligence in any deal, whether it’s a takeover or an injection of investment capital, cannot be over emphasised.
The purpose of due diligence is to confirm or reject the assumptions others have made regarding valuation and to identify any associated risks. Poor due diligence can result in the buyer or investor being asked to pay over-the-odds for their stake; taking on unknown risks and liabilities; or being unable to integrate the business, where synergy may be the primary reason for pursuing the deal.
They are all valid reasons for a buyer or investor to walk away.
For technology-driven businesses looking to attract a buyer or additional investment, ensuring the intellectual property portfolio is “due diligence ready” is therefore essential if a sale or investment is to progress easily.
Here are some tips:
1. Ensure that ownership is clear
In our experience, when a deal falls through due to the IP, messy ownership is a common cause of that failure.
A top tip is to make sure the inventors are correctly identified and that the chain of title is clear and well-documented.
Make sure that all necessary assignments are correctly executed (and registered, where appropriate) and save yourself time further on in the due diligence process by uploading all documents to your central data room.
2. Create an IP register
Have an up-to-date IP register ready to go at all times (perhaps update this once a month).
This should include not only patents, trademarks and designs, but also other forms of IP such as copyright and know-how.
Include some basic information in the IP register such as application numbers and status, since this is always the first piece of information that is asked for in due diligence.
For a comprehensive approach, also upload and save all published applications and granted patents to your data room.
3. Map the commercial products
We like to do this as a “mind map” with a particular commercial product at the centre, showing how the different types of IP map to that product.
This document will serve as a useful cheat sheet during due diligence.
4. Prosecute the IP intelligently
There is no “one size fits all” approach to IP.
It is always best to review a particular innovation regularly (we suggest at least quarterly) and ensure that the strategy is tailored to the commercial strategy.
For example, if a company is being set up for a trade sale, and it is clear that an issued patent in the US is vital to the deal going through, then take steps to accelerate prosecution in the US, for example by filing early in the US, requesting an examiner interview or filing a track one application.
5. Write down an explicit IP strategy
This should be as detailed and as clear as possible.
For example, an IP strategy is not “we will file patent applications as new innovations are identified”.
A good IP strategy may provide detail about how future innovations are actually identified, for example by having regular meetings with the technical teams, the business development team and the IP attorney, with the remit of reviewing recent R&D.
You may also decide to have an incentive for employees to innovate, for example.
If collaborations are involved, the IP strategy might explicitly point to an IP section of a research agreement and show that the ownership situation is clear.
In summary, an explicit IP strategy demonstrates a high level of IP awareness to a potential investor/partner.
6. Consider freedom to operate
We do not necessarily recommend that a full freedom to operate search is conducted; indeed that is often not the correct course of action.
However, it is important to show awareness of the need to consider freedom to operate, and to show that you understand the distinction between obtaining your own IP Portfolio and the impact of third party patents on your commercial plans.
This should therefore be written down as an explicit plan as part of the overall commercial strategy.
7. Always return to the business plan
The golden rule is to always revisit the business plan.
The value of your intellectual property will inevitably decrease when sight of the ultimate commercial goals and/or the exit strategy is lost.
It is always a good idea to begin all IP meetings with a high level overview of the business plan and commercial goals, since that is key to shaping the IP strategy.
IP due diligence is all about establishing trust and maintaining confidence.
It’s a fantastic opportunity to show to any buyer or investor that the innovation underpinning the technology is sound and can be protected, that the intellectual property is being correctly managed and that all possible commercial risk relating to the IP has been correctly identified and evaluated.
Doing this provides an enormous potential opportunity to achieve the value you want rather than allowing the buyer or investor to leverage poor administration as an excuse to drive down the value or even walk away.
Of course if there are two interested parties you may even achieve a premium!