This is a true story. Only the names have been changed. My client (let’s call her Karina) had negotiated a deal with the owner of another company (lets call him Phil) to acquire Phil’s company. During due diligence we discovered that Phil’s company didn’t own the code to its own website. Considering the business was an online store, the code to the website (a form of intellectual property or IP) was a vital assets.

When we pointed this out to Phil, his reaction was “That’s crazy. Of course we own it. We paid for it.” But he had neglected to put a “work for hire” clause in the contract with the developer. So he didn’t own the code. This nearly killed the deal. There was no way we were going to complete the purchase without getting ownership of the core IP. The deal was put on hold for a month while Phil negotiated with the developer to acquire ownership of the code. Lord knows how much more he had to pay the guy. And he almost lost the deal. He was lucky Karina didn’t walk.

The same thing would’ve happened if Karina were an angel or VC about to invest in the company. One of the main things they do is confirm the company owns the IP.

The lesson is, when you or your client hire service providers to create any intellectual property (basically any work product or deliverable), make sure the contract states that the company owns any IP the person creates. Of course the contract should also require them to keep company information confidential. This should be part of the standard onboarding process for all employees and contractors.

That way when the company receives a due diligence list from a potential buyer or investor, it’s an easy matter to just send them copies of the contracts all the service providers signed, so the buyer/investor can see they own their IP (and that they are well organized and professional).

Feel free to contact me if you have any questions.

This article is not intended and should not be relied upon as legal or tax advice pertaining to any specific matter.  You are encouraged to seek competent legal and tax counsel before proceeding with any transaction involving any of the matters discussed above.