Understanding IP due diligence for seed and pre-seed start-ups

In the realm of start-ups and investments, investors are now placing an increasingly high value on the critical role IP plays in the growth trajectory of start-ups. As a result, many are now asking IP professionals to provide them with independent verification that the start-ups they are interested in genuinely understand IP and, more importantly, how to use it strategically to underpin their growth and future success.

For pre-seed start-ups, a good grasp of the IP landscape and an outline IP strategy aligned with their business plan are positive indicators.

By the seed stage, initial IP protection should be in place, with a formal review of key elements of their Freedom to Operate (FTO) position.

Once a start-up is at the Series A stage or beyond, robust IP protection should be in place, and the start-up should continually be reviewing and updating their IP strategy to ensure they remain investor-ready.

WHAT IS IP DUE DILIGENCE?

IP due diligence is a comprehensive evaluation of a start-up's IP assets and rights. It is aimed at uncovering the true value and potential risks associated with the start-up's IP portfolio. The process extends beyond merely confirming the existence of IP rights; it is an in-depth approach encompassing the entire company - its ideas, products, people and business plans.

Therefore, IP due diligence should be wide-ranging, all-inclusive and conducted with a commercial focus in order to aid investors in gauging the potential for success and the potential return on investment.

WHO SHOULD CONDUCT IP DUE DILIGENCE AND WHEN?

Ideally, IP due diligence should be performed by experienced IP attorneys. This process should start as early as possible in the investment process to identify and address any issues.

THE IP DUE DILIGENCE PROCESS: A SIX-STEP GUIDE

Navigating the world of IP due diligence can seem like a daunting task. However, by breaking it down into six key steps, we can systematically evaluate and analyse the start up's IP position.

1. Identify Existing IP Assets

Identifying a start-up's existing IP assets forms the first step in the process. This step entails requesting detailed information from the start-up, such as an overview of the company's IP, a list of IP rights, how the IP rights map to the IP, an understanding of any trade secrets or proprietary information, and details of any new IP in the pipeline.

It also involves understanding the company's IP management process, like who handles IP matters, how the start-up protects its IP, and how new IP is identified and safeguarded.

In addition to this, investors should request information about any freedom to operate (FTO) searches and analysis the start-up has conducted.

2. Verify Ownership

Ownership verification is a critical aspect of IP due diligence.

It involves understanding the genesis of the innovation - knowing who created it, when and where it was made, and whether any third parties were involved. This requires reviewing all pertinent IP assignments, licences and collaboration agreements to establish the chain of ownership or entitlement.

3. Assess Scope and Validity of IP Rights

The scope and validity of IP rights form the crux of a start-up's IP arsenal.

This step entails reviewing the geographical coverage and term of protection of their IP rights, checking for any challenges by an IP office or a third party, and assessing the enforceability of IP assets. This process will require independent checks of official IP registers, and in more complex cases may require a professional opinion.

4. Evaluate IP Strategy and Future Plans

A start-up's IP strategy and future plans can reveal a lot about its market preparedness and future sustainability. This step necessitates understanding how they manage IP within their organisation, their approach to IP protection, how they identify and protect new IP, how they manage confidential information, and how often they review their IP strategy.

It is equally essential to see how the IP strategy aligns with the company's current and future business goals.

5. Identify Potential IP Risks

No due diligence process is complete without risk identification. This could include insufficient IP strategy, gaps in IP protection, deficient IP agreements, or the existence of key competitors. Also, any ongoing or potential disputes should be considered.

Identifying potential IP risks allows for recommendations like creating a more structured IP strategy, applying for additional or alternative protection, reviewing or updating IP agreements, or carrying out FTO searches and competitor IP watches.

6. Consider IP in the Investment Decision

Finally, the IP must be considered in the overall investment decision. It is vital to evaluate the IP's contribution to the company's valuation, the potential for growth based on the IP assets, and any IP-related issues that could impact a successful investment.

The decision should also consider whether the issues can be fixed or mitigated.

WHAT IS THE TRUE VALUE OF IP DUE DILIGENCE?

In conclusion, conducting thorough IP due diligence is not just a nice-to-have but a must-have for any investor considering seed and pre-seed start-ups.

IP due diligence brings to light the IP strengths and weaknesses of the start-up, impacts the start-up's valuation, de-risks the investment, and paves the way for informed decision-making. As an investor, your focus should be on the bigger picture: a start-up with a strong, enforceable IP portfolio that aligns with its business goals and strategies is more likely to generate a substantial return on investment.

With a rigorous IP due diligence process in place, investors can navigate the investment landscape with confidence, securing promising start-ups and helping them grow into successful, innovative businesses.