A Startups’ Guide To IP Due Diligence: Types, Checklist And More

The concept of intellectual property was developed to ensure that a creator is able to successfully protect their interests. The owner of an IP can be an individual or an entity, and literally anything that could constitute an IP. It can be a piece of content, a painting, an invented product, a new process, a brand name, a local indigenous product or even a song! 

Intellectual property not only serves as a protection granted to secure one’s creative and inventive rights, but it also helps the owner to monetise from or commercialise their inventions and creative works. Over time, it becomes vital to create value from the intellectual property that one owns. When entering into an ‘IP’ deal, it’s important to ascertain the value of the IP, which necessitates due diligence. 

What Is IP Due Diligence?

Intellectual property due diligence, also known as IP due diligence, is an investigation of ownership done to determine the value of the intellectual property. These investigations seek to answer whether certain intellectual property assets should be bought or sold. The checklist helps to make sure every piece of information necessary to answer that question is gathered.

In order to monetise IP, it is recommended to file for applications and gain official records and ownership references. Only when there are official records and ownership references for IPs, does an IP sail through in a due diligence test and become easily eligible for sale, and transfer.

In fact, organisations have started considering purchasing or associating with owners of existing IP, instead of establishing R&D centres and creating everything from scratch on their own. This has greatly contributed to IP commercialisation in the past few years.

Types Of Intellectual Property

The parties involved in the potential transaction must identify the relevant products, methods, or services and establish whether the existing IP covers those products or services. Once a comprehensive list of IP assets has been established, IP counsel may begin digging deeper into the IP portfolio. 

Patent

• A patent is ownership of an idea or invention.
• Patents have been considered a prominent asset. Depending on the utility and strength of the patents, their value can be determined. 
• An invention must fulfil certain requirements to receive a patent and must be unique and properly described in the application. The application must be considered accordingly to ascertain its value. 

Trademark

• A trademark is a source identifier of a good or service and provides protection against unauthorised use and infringement. 
• Trademarks are also categorised as very important assets when a business is being purchased. Business acquisitions or mergers need to consider the transfer of trademarks and brands that can be sold at a substantial price.
• A trademark is limited to the country in which it is registered, so it is important to know in which countries a product is trademarked.

Copyright

• A copyright provides protection to the author of an original work.
• Copyright is a right created to ensure that in case a work is being used in an adaptation or in a different version, the author of such work needs to be monetarily benefited.
• Copyright work must be in a tangible form such as film, music, or writing.

Design

• Industrial designs provide protection to designs of products being used industrially or commercially. Designs can be shapes, patterns, colours, lines or a combination of them that is applied to an object. 
• Designs are protected because the look and shape of a product can greatly increase a product’s marketability. 
• Getting a design registered gives the owner a right to exclusively use the design.

The IP Checklist For Startups

Now that we have discussed what constitutes an IP, let’s go through a basic checklist that a startup should keep in mind when buying or selling its IP. The steps involved in selling and purchasing an IP asset include: 

• Identification Of Intellectual Property Asset: 
  • Startups should examine their business model and functioning and assess which IP to protect. 
  • When it comes to purchasing an IP asset, first identify the asset that is relevant to your business.

• Assess Possible Infringements: 
  • The business must gather information on whether the assets owned are subject to infringement by others, as well as on assets not owned by your company that could be infringing upon the rights of others. 
  • It is vital to ensure that the company you are buying from, owns all rights necessary to make, use, sell, or offer for sale its actual and proposed products.

• Auditing Intellectual Property — Legal Due Diligence & Technical Due Diligence:
  • Ensure if the IP owned by the company has any encumbrances or issues
  • Always investigate to check if there are any defects or issues in the IP.
  • Conduct proper diligence. Asses the IP ownership agreement to check if the is jointly owned with another entity. 

• Assessing Commercial Value and Validity Of The Asset:
  • The value of an IP asset essentially comes from the right the owner has to exclude competitors from using it. 
  • It should generate a measurable amount of economic benefits to its owner/user, and enhance the value of other assets with which it is associated.

• Entering Into Robust IP Transfer Agreements:
  • It is vital to identify and assess the adequacy of provisions in any agreements that could have a significant impact on IP. These include agreements on licensing, assignments, employment and independent contractors, joint ventures and collaborations, and R&D grants.

The surest way a startup can succeed against larger competitors is by protecting its innovations and inventions. These protections not only level the playing field between startups and incumbents but also give investors confidence that their investment will be protected.