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Strategic IP due diligence tips for angel investors

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By Justin Call and Daniel Whittle

Angel investors tend to have solid business backgrounds and are able to analyze the business plan for a candidate company thoroughly, but most angels have little understanding of how intellectual property rights can undermine their investment. Here are some "quick and dirty" questions that angel investors should ask to identify intellectual property issues to prevent investing in a company that is clearly a bad investment.

Who legally owns the identified intellectual property -- the company or the entrepreneur? The candidate company should hold all of the intellectual property, and if not, the entrepreneur should assign all of his rights to the candidate company. Otherwise, there is nothing preventing the entrepreneur from taking the intellectual property and starting another company.

Are all employees bound by contracts that assign all relevant intellectual property to the company? Without proper invention-assignment agreements, there is very little preventing the employee from taking his intellectual property contributions and creating a competing company.

Does the type of intellectual property protection match the candidate company's business strategy? If the intellectual property protection does not encompass the candidate company's products, the company's intellectual property strategy and business strategy are likely not aligned well.

Are all maintenance fees on the patents current as well all trademark renewals? These minor "housekeeping" details of owning intellectual property are often overlooked by entrepreneurs, who are too busy running the company, but nonetheless have major implications as to whether the candidate company actually still has ownership of its intellectual property.

Is there any knowledge of potential intellectual property disputes with competitors or previous employers/employees? If there is a dispute with a competitor or previous employers/employees, the candidate company's intellectual property could be in jeopardy. In addition, there can be risks to investors who invest in companies that are found to have willingly infringed the intellectual property of others.

Does the candidate company's technology depend on the intellectual property of a third party? If yes, then the candidate company should have some sort of licensing arrangement in place to ensure continued access to the intellectual property.

Do products depend upon trade secrets? In order for a company to enjoy trade secret protection, the trade secret must confer some economic benefit on the company and, more importantly, the company must take active steps to protect the trade secret, such as put in place proper nondisclosure agreements with its employees and put controls on who can access the company's secrets.

What companies have patents or published applications in the same technology classification as the candidate company? If there are many patents or applications held by Fortune 500 companies in a field, this should give any angel investor pause. If the candidate company's products even appear to infringe a competitive product of a company that size, there is a high likelihood that the larger company will call forth its overwhelming legal arsenal.

Of course, any investor is well-advised to consider expert advice in examining the intellectual property of a candidate company, but these questions provide an important starting point.

(Originally published at http://masshightech.bizjournals.com/masshightech/stories/2008/02/11/focus2.html)

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