How to Handle Intellectual Property Rights in the Sale of Your Tech Business

For founders of software and technology companies, intellectual property (IP) is often the most valuable asset on the balance sheet — and the most scrutinized during a sale. Whether you’re preparing for a strategic acquisition, private equity investment, or full exit, properly managing your IP rights can significantly impact valuation, deal structure, and post-closing risk.

This article outlines the key considerations for handling intellectual property rights in a tech M&A transaction, from pre-sale preparation to post-closing protections. Drawing on insights from real-world deals and the experience of firms like iMerge Advisors, we’ll help you navigate this critical component of the exit process.

Why IP Matters So Much in Tech M&A

In traditional industries, tangible assets like inventory or equipment may drive valuation. In software, SaaS, and internet businesses, it’s the codebase, algorithms, trademarks, and data rights that buyers are really acquiring. IP is the foundation of your competitive moat, your recurring revenue, and your future roadmap.

Buyers — especially strategic acquirers and institutional investors — will conduct rigorous due diligence to ensure that:

• You actually own the IP you claim to own
• There are no encumbrances, disputes, or third-party claims
• The IP is properly protected and transferable
• Open-source usage is compliant and documented

Failure to address these issues early can delay or derail a deal, reduce your valuation, or lead to post-closing indemnity claims.

Step 1: Conduct an Internal IP Audit

Before you even engage with buyers, conduct a thorough internal audit of your intellectual property. This includes:

• Source Code Ownership: Ensure all code was developed by employees under proper work-for-hire agreements or assigned by contractors via IP assignment clauses.
• Trademarks and Branding: Verify that your trademarks are registered (or at least applied for) in relevant jurisdictions and that there are no conflicting marks.
• Patents: If applicable, confirm that patents are properly filed, assigned to the company, and not subject to licensing restrictions.
• Open-Source Compliance: Document all open-source components used in your software and ensure compliance with their licenses (e.g., MIT, GPL, Apache).
• Third-Party Licenses: Review any third-party software or data licenses to ensure they are transferable and do not restrict M&A activity.

Firms like iMerge often recommend completing this audit well before going to market — ideally as part of your exit business planning strategy. This allows time to clean up any issues before they become deal-breakers.

Step 2: Clarify Ownership and Assignment

One of the most common IP issues in tech M&A is unclear ownership. For example, if a former contractor wrote key parts of your codebase but never signed an IP assignment agreement, you may not legally own that code — even if you paid for it.

To avoid this, ensure that:

• All employees and contractors have signed IP assignment agreements
• Founders have assigned any pre-incorporation IP to the company
• There are no joint ownership claims with third parties (e.g., partners, universities, or accelerators)

Buyers will request these documents during due diligence. If they’re missing, it can trigger escrow holdbacks or even kill the deal. As we noted in Completing Due Diligence Before the LOI, early preparation is key to maintaining leverage and momentum in negotiations.

Step 3: Structure the Deal to Protect IP Value

How you structure the transaction can also affect how IP is transferred and protected. In an asset sale vs. stock sale, for example, the mechanics of IP transfer differ:

• Asset Sale: IP must be explicitly listed and assigned in the purchase agreement. This includes domain names, trademarks, patents, and software code.
• Stock Sale: The IP remains with the legal entity, so transfer is automatic — but buyers still want reps and warranties confirming clean ownership.

In either case, expect to provide detailed representations and warranties about your IP. These may include:

• That you own all IP free and clear of liens or claims
• That no IP infringes on third-party rights
• That all IP is properly registered and maintained

Negotiating these reps — and the associated indemnities — is a critical part of the deal. Experienced M&A advisors like iMerge help sellers strike the right balance between buyer comfort and seller protection.

Step 4: Address Open-Source and Third-Party Risks

Open-source software (OSS) is ubiquitous in modern development, but it can introduce risk if not properly managed. Some licenses (like GPL) require that derivative works be open-sourced — a potential red flag for acquirers.

To mitigate this:

• Maintain a Software Bill of Materials (SBOM) listing all OSS components
• Use automated tools to scan for license compliance
• Adopt a formal open-source policy and approval process

Similarly, review any third-party APIs, SDKs, or data sources your product relies on. Are those licenses assignable? Do they require notice or consent in a change of control? These details can affect deal timing and structure.

Step 5: Plan for Post-Closing IP Integration

Finally, consider how your IP will be integrated post-closing. Strategic buyers may want to merge your codebase into their platform, rebrand your product, or consolidate patents. This can raise questions about:

• Code portability and documentation
• Brand transition and customer communication
• Patent enforcement or monetization strategies

In some cases, sellers negotiate ongoing involvement — such as consulting agreements or earn-outs — to support IP transition. As we explored in How Do I Handle Earn-Outs in the Sale of My Software Business?, these arrangements can align incentives but require careful structuring.

Conclusion

Intellectual property is the crown jewel of most tech businesses — and the linchpin of a successful exit. By proactively auditing your IP, clarifying ownership, ensuring compliance, and structuring the deal thoughtfully, you can preserve value and reduce risk.

Firms like iMerge Advisors specialize in helping software and technology founders navigate these complexities. From pre-market preparation to final negotiations, we ensure your IP story is clear, credible, and compelling to buyers.

Founders navigating valuation or deal structuring decisions can benefit from iMerge’s experience in software and tech exits — reach out for guidance tailored to your situation.