Hidden IP Risks That Kill Deals After the LOI
Why the most expensive intellectual property issues surface only when leverage is gone.
By Anu Kinhal & Talha Wajeeh
Most M&A professionals have lived some version of this story.
The letter of intent is signed. Momentum is strong. Deal teams are already talking integration timelines. Then IP diligence starts—and suddenly, what looked like a clean transaction begins to wobble.
Not because of headline-grabbing litigation.
Not because the target “doesn’t own any IP.”
But because the details don’t line up.
The most dangerous IP risks rarely derail deals early. They surface after the LOI, when exclusivity is in place and negotiating leverage has quietly shifted.
Why IP Issues Hurt More After the LOI
Before the LOI, IP is discussed at a high level: “Yes, we own our technology.” After the LOI, buyers ask the only question that matters: “Can you prove it?”
That’s when problems become expensive.
At this stage:
Walking away has reputational and opportunity costs
Re-trading the deal strains trust
Deal value unnecessarily fluctuates
Fixes require time, waivers, or post-closing risk allocation
What follows are the IP diligence issues that repeatedly cause late-stage friction—and sometimes kill deals outright. This article discusses common issues that should be identified early on in the diligence process so that deals under LOI can sail smoothly towards closing.
1. IP Was Never Properly Assigned
One of the most common—and most underestimated—failures.
Even when valuable IP exists, it may not legally belong to the company. During diligence, buyers often uncover gaps in the chain of title, including where inventions were created before formal assignments were executed, or where contributors never transferred rights at all.
These defects can be difficult to cure retroactively, especially if former employees or contractors are uncooperative, hostile, or otherwise unavailable.
From a buyer’s perspective, unclear ownership undermines exclusivity, enforceability, and freedom to operate. As a result, assignment gaps can trigger escrow holdbacks, special indemnities, or last-minute deal restructuring – events that can easily be avoided by having IP rights properly assigned to the company that developed the IP.
Common red flags to watch out for:
Missing invention assignment agreements
Contractor agreements without clear IP transfer language
Employment agreements signed after core development occurred
The result? The company may use the IP—but does not actually own it.
For buyers, this is a potentially incurable defect.
2. Core Technology Built by a Third Party
Many startups outsourced early development to save time and cash. Perfectly reasonable—until you start diving into diligence.
When a company's core technology is developed by a third party (including offshore teams, a dev shop, a former consultant, etc.), ownership of that core technology cannot be assumed. Unless the governing agreements include clear "work for hire" provisions and clear IP assignment language, the third party developer might try and retain rights to the product as a whole or its underlying technology (such as the code).
In these situations, buyers face uncomfortable questions:
Can the third party reuse the code elsewhere?
Can they block commercialization?
Do they retain residual rights?
If answers are unclear, risk pricing follows.
Unclear ownership can restrict the buyer’s ability to modify, scale, or exclusively commercialize the technology, often resulting in valuation adjustments, remediation demands, or deal delays.
3. Brand Value Without Brand Protection
Another late-stage surprise: the “brand” exists—but the legal protection doesn’t.
Examples we see regularly:
Trademarks never registered
Marks registered in the wrong entity’s name
Use that predates clearance searches
Trademarks were abandoned and/or cancelled because the owner did not renew the registration
Quiet infringement risks that no one flagged
When a meaningful portion of enterprise value sits in the brand, uncertainty here becomes existential, and could ultimately lead the deal to fall through.
Brand protection, of course, allows parties to enforce their trademark rights (including protecting their brand name, logos, taglines, trade dress, colors (in some cases!)), but they also allow the underlying company to be operational. This is done by allowing the owner to heavily invest in building a market presence for the brand as well as building the goodwill associated with the brand (which is quite literally an asset that is valued when acquiring the brand).
In a more practical, short-term sense, the lack of brand protection through registered and vetted trademarks can result in the deal value being adjusted (typically downward) and closing delayed while cleanup efforts are being made. In the worst-case scenario, buyers will walk away entirely.
4. Open-Source Contamination in Proprietary Code
Open-source software is not the problem because it can accelerate the development of a product. Unmanaged open-source use is because it can create significant (and deal-ending) risk in an acquisition.
Buyers increasingly scrutinize:
GPL or copyleft licenses embedded in core code
Missing open-source policies
Missing or improper compliance or attribution with certain restrictive licenses (e.g., GPL)
No audit trail for third-party libraries
Poor documentation, lack of a software bill of materials (SBOM), or developer-level code reuse without legal review can exacerbate the issue.
Remediation is often costly, time-consuming, and may require code refactoring—making open-source misuse a frequent driver of valuation discounts or deal friction.
Why These Issues Surface So Late
Founders often assume: “This is how everyone does it.”
Lawyers and buyers know better: “This is exactly where deals break.”
IP issues remain hidden because:
Early companies prioritize speed over structure
Founders conflate control with ownership
No one pressures documentation until diligence
By the time the problems surface, the buyer is already invested in closing the transaction, and the seller is already exposed with the risks associated with weak IP protection.
The Takeaway
IP diligence isn’t about checking boxes.
It’s about confirming that the asset being sold actually exists in the form the deal assumes. This is not only a trust building exercise between the buyer and the seller, but ensures that once the deal closes, the acquired company can operate effectively, which in the aggregate benefits society.
By recognizing, flagging, and correcting the issues discussed in this article, parties can make it out of the LOI to closing in a way that builds trust, increases the overall value of the deal, and allows the acquired company to be operational on day one.
The most expensive IP risks:
Don’t announce themselves early
Don’t show up on pitch decks
Don’t feel urgent—until they are
And by then, leverage has already shifted.
Disclaimer
This article is provided for general informational purposes only and does not constitute legal advice. The views expressed are based on professional experience and are not intended to address the specific facts or circumstances of any particular transaction. Readers should consult qualified legal counsel before acting on any information discussed herein.
