How do I protect my IP during buyer due diligence?

How to Protect Your Intellectual Property During Buyer Due Diligence

For software founders and tech CEOs, intellectual property (IP) is often the crown jewel of the business — the core codebase, proprietary algorithms, customer data models, or even unique UI/UX frameworks that differentiate your product in a crowded market. When entering M&A discussions, especially during buyer due diligence, protecting that IP becomes both a legal and strategic imperative.

But here’s the paradox: to sell your company, you must reveal what makes it valuable. Yet, revealing too much too soon — or to the wrong party — can expose your business to risk, especially if the deal doesn’t close. So how do you strike the right balance?

This article outlines the key strategies to protect your IP during buyer due diligence, drawing on best practices from successful software exits and the experience of M&A advisors like iMerge.

Why IP Protection Matters in M&A

In software and technology transactions, IP is often the primary driver of valuation. Buyers — whether strategic acquirers or private equity firms — want to ensure that the assets they’re acquiring are:

Legally owned and properly assigned
Free of encumbrances or third-party claims
Scalable, secure, and defensible

However, the due diligence process can inadvertently expose sensitive information to competitors, especially if the buyer is a strategic player in your space. Even if the deal falls through, they may walk away with insights into your architecture, customer base, or roadmap.

That’s why protecting your IP isn’t just about legal compliance — it’s about preserving your competitive advantage.

1. Use a Tiered Disclosure Approach

One of the most effective ways to protect your IP is to structure due diligence in phases. Early-stage discussions should focus on high-level overviews, with deeper technical disclosures reserved for later stages — ideally after a signed Letter of Intent (LOI) with exclusivity provisions.

As we noted in Completing Due Diligence Before the LOI, premature disclosure can weaken your negotiating position. A tiered approach might look like this:

Pre-LOI: Share general product capabilities, market positioning, and high-level architecture diagrams.
Post-LOI (with NDA and exclusivity): Provide access to source code repositories, patent filings, and detailed technical documentation.
Pre-closing: Allow code audits or third-party validation under strict supervision.

2. Enforce Robust NDAs — But Don’t Rely on Them Alone

Non-disclosure agreements (NDAs) are a baseline requirement, but they’re not a silver bullet. A well-drafted NDA should include:

Clear definitions of confidential information
Limitations on use (e.g., for evaluation purposes only)
Non-solicitation clauses to protect your team
Survival clauses that extend beyond the deal timeline

However, enforcement can be difficult — especially if the buyer is a large multinational with deep legal resources. That’s why NDAs should be paired with practical safeguards, such as limiting access to sensitive materials and watermarking shared documents.

3. Control the Data Room

Virtual data rooms (VDRs) are the standard for managing due diligence, but how you configure them matters. Use granular permissions to control who sees what, and track all activity within the platform. Some best practices include:

Restricting download and print capabilities
Watermarking documents with user-specific identifiers
Segmenting access by functional area (e.g., finance, tech, legal)
Using read-only formats for sensitive code or IP documentation

Firms like iMerge often help clients structure and manage VDRs to ensure that disclosures are both compliant and strategically timed.

4. Vet the Buyer — Especially Strategic Acquirers

Not all buyers are created equal. Strategic acquirers — especially those in adjacent or overlapping markets — may have more incentive to mine your IP than to close a deal. Before granting access to sensitive materials, assess the buyer’s track record:

Have they acquired similar companies before?
Do they have a history of walking away post-diligence?
Are they a direct or indirect competitor?

In some cases, it may be appropriate to limit disclosures or require third-party code audits rather than direct access. This is particularly relevant when selling to a competitor, as discussed in What are the risks of selling my software company to a competitor?.

5. Confirm IP Ownership and Clean Up Assignments

Before entering due diligence, ensure that your IP house is in order. This includes:

Verifying that all code is owned by the company, not contractors or former employees
Ensuring all contributors have signed IP assignment agreements
Reviewing open-source components for license compliance
Registering trademarks, patents, or copyrights where applicable

Buyers will scrutinize these areas closely. Any ambiguity can delay the deal or reduce valuation. As part of Top 10 Items to Prepare When Selling Your Website, iMerge emphasizes early IP audits to avoid surprises during diligence.

6. Consider Third-Party Code Escrow or Audit

In some cases, buyers may request access to your source code to validate quality, security, or scalability. Rather than granting direct access, consider using a third-party code escrow or audit service. These firms can:

Review code for quality and documentation standards
Validate that the code matches product claims
Provide a neutral report to the buyer

This approach protects your IP while still giving the buyer confidence in the asset they’re acquiring.

7. Align Legal and Deal Teams Early

Finally, ensure that your legal counsel and M&A advisor are aligned from the outset. IP protection isn’t just a legal issue — it’s a deal strategy. Your advisor should help you:

Sequence disclosures to maintain leverage
Negotiate reps and warranties that limit post-closing exposure
Position your IP as a value driver, not a risk factor

At iMerge, we often coordinate closely with legal teams to ensure that IP protection is embedded into the broader transaction strategy — from initial outreach to final closing.

Conclusion

Protecting your intellectual property during buyer due diligence is a delicate balancing act. You must be transparent enough to build buyer confidence, yet cautious enough to preserve your competitive edge. By structuring disclosures, controlling access, and aligning your legal and advisory teams, you can navigate this phase with confidence.

Use this insight in your next board discussion or strategic planning session. When you’re ready, iMerge is available for private, advisor-level conversations.