Unassigned IP from Early Contractors: A Hidden Risk in M&A Due Diligence
In the early days of a startup, speed often trumps structure. Founders focus on building product, acquiring users, and iterating fast. Legal formalities—like intellectual property (IP) assignment agreements—can fall by the wayside. But when it comes time to sell your software company or raise institutional capital, those early oversights can become material liabilities.
One of the most common red flags that surfaces during M&A due diligence is the lack of signed IP assignment agreements from early contractors or freelancers. If your company is in this position, you’re not alone—but it’s critical to understand the implications and take corrective action before entering serious deal discussions.
Why IP Assignment Matters in M&A
Buyers—especially strategic acquirers and private equity firms—are buying more than just revenue. They’re acquiring the underlying technology, codebase, and proprietary assets that drive your business. If you can’t prove that your company owns the IP outright, it introduces legal uncertainty and potential future claims.
Here’s how this issue typically plays out during diligence:
Buyers request a full IP chain of title. This includes employment and contractor agreements with IP assignment clauses for anyone who contributed to the codebase or product.
Missing agreements trigger legal review. If early contributors never assigned their rights, the buyer’s legal team may flag this as a material risk.
Deal terms may be adjusted. Buyers may demand indemnities, escrow holdbacks, or even reduce the purchase price to account for the risk.
In some cases, the deal can stall or fall apart entirely if the IP ownership can’t be cleaned up. As we’ve seen in multiple transactions at iMerge, even a single missing agreement from a key early developer can create disproportionate friction late in the process.
How Big of a Problem Is It, Really?
The severity depends on several factors:
Materiality of the contractor’s contribution. If the individual wrote core code or designed foundational architecture, the risk is higher.
Time elapsed since the work was done. If the contractor hasn’t been involved in years and the code has since been rewritten, the risk may be lower—but still not zero.
Jurisdiction and legal precedent. In some states (like California), work-for-hire presumptions are weaker, and explicit assignment is required.
Buyers will also consider whether the contractor was paid, whether there’s any written agreement at all (even if it lacks IP language), and whether the individual is likely to assert a claim. But make no mistake: this is a diligence item that can materially impact deal certainty and valuation.
What You Can Do Now to Fix It
Fortunately, this is a solvable problem—if addressed proactively. Here’s a step-by-step approach:
1. Identify All Early Contributors
Start by compiling a list of all non-employee contributors—freelancers, contractors, agencies—who worked on your product, codebase, or IP. Focus especially on the first 12–24 months of the company’s life.
2. Audit Existing Agreements
Review whether any of these individuals signed contracts, and if so, whether those contracts include IP assignment clauses. If you used a freelance platform (like Upwork), check their standard terms—some include default IP transfer provisions, but not all.
3. Reach Out for Retroactive Assignments
For any gaps, reach out to the individuals and request that they sign a retroactive IP assignment agreement. These are standard legal documents that confirm the contractor assigns any rights they may have had to the company. In many cases, former contractors are cooperative—especially if they were paid and have no ongoing interest in the IP.
Be prepared to offer a nominal payment or consideration if needed. This can help ensure enforceability and goodwill.
4. Document Everything
Keep a clean record of all signed agreements, communications, and payment history. This will be invaluable during diligence. If you’re unable to locate a contractor or they refuse to sign, document your efforts and consult legal counsel on next steps.
5. Work with Counsel to Mitigate Residual Risk
If you can’t obtain full assignments from all parties, your legal team can help draft representations, warranties, and indemnities that address the issue. In some cases, buyers may accept a risk-adjusted solution if the exposure is well understood and limited in scope.
Proactive IP Hygiene Increases Valuation
At iMerge, we’ve seen firsthand how early legal cleanup can increase deal confidence and reduce friction. In one recent transaction, a SaaS company had three early developers who never signed IP agreements. By proactively securing retroactive assignments before going to market, the company avoided a potential 10% escrow holdback and closed the deal on schedule.
As we’ve outlined in our Top 10 Items to Prepare When Selling Your Website, clean IP ownership is one of the most scrutinized areas in software M&A. It’s also one of the most fixable—if addressed early.
For founders considering a future exit, this is a prime example of why exit planning strategy should begin well before you engage buyers. Firms like iMerge help clients identify and resolve these issues in advance, so they don’t become deal-breakers later.
Conclusion
Unassigned IP from early contractors is a common but serious issue in software M&A. While it may seem like a minor oversight, it can create real legal and financial risk during due diligence. The good news: with the right approach, it’s usually fixable.
Start by identifying the gaps, securing retroactive assignments, and documenting your efforts. The earlier you address this, the more leverage you’ll have when it matters most—at the negotiating table.
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.
What Privacy, Security, and Compliance Documentation Will Acquirers Expect?
For software startups handling significant volumes of user data, privacy and security compliance is no longer a back-office concern — it’s a core value driver in M&A. Whether you’re preparing for a strategic exit or simply fielding inbound interest, acquirers will scrutinize your data governance posture with the same rigor they apply to financials or IP ownership.
In this article, we’ll outline the key privacy, security, and compliance documentation that buyers — especially private equity firms and strategic acquirers — expect to see during due diligence. We’ll also explore how early preparation in these areas can materially impact valuation and deal certainty.
Why Data Compliance Is a Deal-Maker (or Breaker)
In today’s regulatory environment, data is both an asset and a liability. A well-documented compliance program can enhance buyer confidence, reduce indemnity holdbacks, and even justify a premium valuation. Conversely, gaps in data protection — or worse, a breach history — can derail a deal or lead to significant post-closing exposure.
Firms like iMerge often advise software founders to treat data compliance as a precondition to exit readiness, not a post-LOI scramble. As we’ve seen in numerous transactions, the presence (or absence) of key documentation can influence everything from buyer interest to final purchase price.
Core Documentation Buyers Expect
Below is a breakdown of the most commonly requested privacy, security, and compliance documentation during M&A due diligence for data-centric startups:
1. Data Privacy Policies and Regulatory Compliance
GDPR Compliance Documentation – If you have users in the EU, buyers will expect to see your Article 30 records of processing activities, data subject access request (DSAR) procedures, and lawful basis assessments.
CCPA/CPRA Compliance – For California users, documentation around consumer rights, opt-out mechanisms, and data sale disclosures is essential.
Privacy Policy (Public-Facing) – A clear, up-to-date privacy policy that aligns with your actual data practices is a must. Buyers will compare this to your internal procedures.
Data Processing Agreements (DPAs) – Contracts with vendors and subprocessors that handle personal data, especially if hosted on third-party infrastructure (e.g., AWS, Google Cloud).
2. Security Frameworks and Certifications
SOC 2 Type II Report – This is increasingly viewed as the gold standard for SaaS companies. It demonstrates that your controls are not only designed effectively but have operated effectively over time.
Pentest Reports and Remediation Logs – Buyers will want to see recent penetration testing results and evidence that vulnerabilities were addressed.
Security Policies and Incident Response Plans – Internal documentation covering access controls, encryption standards, employee training, and breach response protocols.
Third-Party Risk Management – A list of vendors with access to sensitive data, along with your vetting and monitoring procedures.
3. Data Governance and Operational Controls
Data Retention and Deletion Policies – How long do you store user data, and how is it deleted upon request or inactivity?
Access Logs and Audit Trails – Evidence that access to sensitive data is monitored and restricted on a need-to-know basis.
Employee Onboarding/Offboarding Procedures – Especially for roles with access to production environments or customer data.
4. Risk Assessments and Breach History
Risk Assessments – Internal or third-party assessments of your data security posture, including any mitigation plans.
Incident Logs – A record of past security incidents, how they were handled, and what changes were made afterward.
Cyber Insurance Policies – Coverage details, limits, and exclusions related to data breaches or regulatory fines.
How This Impacts Valuation and Deal Structure
From a buyer’s perspective, strong compliance documentation reduces perceived risk — and risk is a key input in valuation models. For example, a SaaS company with a clean SOC 2 report and GDPR compliance may command a higher multiple than a peer with similar revenue but weaker controls.
Moreover, buyers may adjust deal terms based on compliance maturity. A lack of documentation could lead to:
Increased escrow or indemnity holdbacks
Delayed closing timelines due to extended diligence
Lower valuation due to perceived regulatory exposure
Case Example: A SaaS Exit Delayed by Compliance Gaps
Consider a mid-market SaaS company with $8M ARR and a strong customer base in Europe and North America. The company received a compelling acquisition offer from a strategic buyer. However, during diligence, the buyer discovered that the company lacked a formal data processing inventory and had no documented DSAR process — a red flag under GDPR.
As a result, the buyer paused the deal, requested a third-party compliance audit, and ultimately reduced the offer by 10% to account for remediation costs and regulatory risk. The deal still closed, but the founders left money on the table — a preventable outcome had they invested in compliance readiness earlier.
Preparing for Exit: A Strategic Approach
For founders considering a sale in the next 12–24 months, now is the time to invest in compliance infrastructure. Here’s a practical roadmap:
Conduct a Data Compliance Audit – Identify gaps in your privacy, security, and governance practices.
Prioritize Certifications – If you’re targeting enterprise buyers, a SOC 2 Type II report can be a differentiator.
Document Everything – Buyers don’t just want to hear that you’re compliant — they want to see it in writing.
Engage Advisors Early – M&A advisors like iMerge can help you position your compliance posture as a value driver, not just a checkbox.
In today’s M&A landscape, privacy and security compliance is no longer optional — it’s foundational. Buyers expect clear, auditable documentation that demonstrates your commitment to protecting user data and managing risk. The earlier you build this into your operating model, the more leverage you’ll have when it’s time to negotiate.
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.
Open Source in AI SaaS: Licensing and IP Risks in M&A — And How to Prepare
In today’s AI-driven SaaS landscape, leveraging open-source libraries and pre-trained models is not just common — it’s foundational. From TensorFlow and PyTorch to Hugging Face transformers and scikit-learn, these tools accelerate development and reduce costs. But when it comes time to sell your company or raise capital, what once felt like a technical shortcut can become a legal and financial landmine.
At iMerge, we’ve advised on numerous software and AI transactions where open-source usage became a central diligence issue. If your product incorporates open-source components — especially if you’ve fine-tuned or modified them — it’s critical to understand the licensing implications and how they may affect your valuation, deal structure, or even deal viability.
Why Open Source Raises Red Flags in M&A
Buyers — particularly strategic acquirers and private equity firms — are increasingly cautious about open-source software (OSS) usage. Their concern isn’t philosophical; it’s legal and financial. Improper use of OSS can expose the acquirer to:
License violations that require code disclosure or restrict commercial use
IP contamination that undermines proprietary claims
Unclear ownership of derivative works or fine-tuned models
Litigation risk from rights holders or contributors
These risks can delay a deal, reduce the purchase price, or lead to post-closing indemnification claims. In some cases, they’ve caused buyers to walk away entirely.
Key Licensing Issues to Watch
Not all open-source licenses are created equal. Some are permissive and business-friendly; others are “copyleft” licenses that impose strict obligations. Here are the most common categories:
These licenses allow you to use, modify, and distribute the code — even in proprietary products — with minimal restrictions. Apache 2.0, for example, includes an explicit patent grant, which is attractive to acquirers. These licenses are generally low-risk in M&A.
2. Copyleft Licenses (e.g., GPL, AGPL, LGPL)
These licenses require that derivative works also be open-sourced under the same license. The GNU General Public License (GPL) is particularly problematic in commercial settings. If your SaaS product includes or links to GPL-licensed code, you may be obligated to release your source code — a non-starter for most acquirers.
The Affero GPL (AGPL) goes even further, applying to software accessed over a network — a direct hit to SaaS models. If you’ve fine-tuned an AGPL-licensed model and deployed it via API, you may be in violation unless you’ve open-sourced your modifications.
AI models often come with custom licenses that restrict commercial use, redistribution, or fine-tuning. For example, Meta’s LLaMA models are released under a non-commercial license, and OpenAI’s models are proprietary. Even open models like BLOOM or Falcon may include clauses that limit usage in certain industries or require attribution.
Buyers will scrutinize whether your use of these models complies with their terms — especially if you’ve built a commercial product on top of them.
How to Prepare for Diligence: A Strategic Checklist
To avoid surprises during due diligence, founders should proactively audit and document their open-source usage. Here’s how:
1. Conduct a Full OSS Inventory
Use automated tools (e.g., FOSSA, Black Duck, Snyk) to scan your codebase and identify all open-source components, including transitive dependencies. Don’t forget Docker images, scripts, and infrastructure code.
2. Map Licenses to Usage
For each component, document:
The license type (MIT, GPL, etc.)
How it’s used (linked, modified, embedded, etc.)
Whether it’s included in distributed code or only used internally
This mapping helps assess exposure and informs your legal strategy.
3. Review Fine-Tuned Models
If you’ve fine-tuned open-source models (e.g., BERT, Stable Diffusion), determine:
Whether the base model allows commercial fine-tuning
If your modifications constitute a derivative work
Whether you’ve redistributed the model or exposed it via API
Some licenses, like OpenRAIL-M, require that fine-tuned models carry forward the same restrictions. Violating these terms can jeopardize your IP claims.
4. Clean Up IP Ownership
Ensure all contributors — employees, contractors, or third parties — have signed IP assignment agreements. This is especially important if they’ve modified open-source code or trained models. Without clear ownership, you can’t transfer rights in a sale.
5. Create an Open Source Policy
Buyers want to see that you’ve institutionalized OSS governance. A written policy should cover:
In M&A, open-source issues can influence both the structure and economics of a deal:
Stock vs. Asset Sale: Buyers may prefer an asset sale to avoid inheriting OSS-related liabilities. (See: Asset versus Stock Sale)
Reps and Warranties: Expect detailed reps around OSS usage, license compliance, and IP ownership. Breaches can trigger indemnification or escrow claims.
Valuation Haircuts: If your core IP is built on restrictive OSS, buyers may discount your valuation or require code rewrites post-close.
In one recent transaction we advised, a SaaS AI company had fine-tuned a model under a non-commercial license. The buyer required a full model retraining on a commercially licensed base — delaying the deal by 60 days and reducing the purchase price by 15%.
Positioning for a Clean Exit
Open-source software is not inherently a problem — but unmanaged OSS is. The key is transparency, documentation, and proactive remediation. Founders who address these issues early can avoid costly surprises and preserve leverage in negotiations.
At iMerge, we routinely help SaaS and AI companies prepare for diligence by conducting pre-sale audits, cleaning up IP chains, and advising on license compliance. This work not only protects value — it often increases it by reducing perceived risk.
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.
How Founders Should Navigate Stay-On and Non-Compete Negotiations in a Tech M&A Deal
When a strategic or financial buyer expresses interest in acquiring your software company, the conversation often extends beyond valuation and deal structure. One of the most consequential — and often underestimated — aspects of the negotiation is what happens to you, the founder, after the ink dries.
Buyers frequently request that founders stay on post-acquisition for a transition period, typically 12 to 36 months. They may also require a non-compete agreement to protect the acquired asset. While these requests are standard, they are not one-size-fits-all. How you negotiate these terms can significantly impact your personal upside, your team’s future, and the long-term success of the integration.
This article outlines how to approach these negotiations strategically, with a focus on protecting your interests while aligning with the buyer’s goals.
1. Understand the Buyer’s Motivation
Before negotiating, it’s critical to understand why the buyer wants you to stay. Is it to ensure a smooth transition of customer relationships? To retain key technical knowledge? Or to lead a new division post-acquisition?
For example, in a recent transaction iMerge advised, the acquirer — a mid-market private equity firm — required the founder to stay on for 24 months to oversee integration and product roadmap alignment. However, the founder negotiated a defined scope of responsibilities and a performance-based bonus structure, ensuring alignment without open-ended obligations.
Clarifying the buyer’s intent helps you frame your role and negotiate terms that are both fair and finite.
2. Define the Scope and Duration of Your Post-Acquisition Role
Too often, founders agree to stay on without a clearly defined role, only to find themselves marginalized or overextended. To avoid this, negotiate:
Title and reporting structure: Will you be a divisional CEO, a product lead, or an advisor? Who will you report to?
Time commitment: Full-time, part-time, or advisory? Can you work remotely?
KPIs and success metrics: Tie your compensation to measurable outcomes, not vague expectations.
Exit triggers: Define what happens if the buyer changes your role, sells the company again, or fails to meet agreed-upon conditions.
These terms should be codified in an employment agreement or consulting contract, separate from the purchase agreement.
3. Structure Compensation to Reflect Risk and Value
If you’re being asked to stay on, you should be compensated not just for your time, but for the value you’re helping preserve or create. Consider negotiating:
Base salary: Benchmark against market rates for similar roles in the acquiring company.
Performance bonuses: Tie to revenue retention, product milestones, or integration success.
Severance protections: If you’re terminated without cause, ensure you’re entitled to severance and accelerated vesting, if applicable.
Firms like iMerge often help founders model these scenarios to understand the true economic value of staying on versus walking away at close.
4. Negotiate Reasonable Non-Compete and Non-Solicit Terms
Non-compete clauses are standard in M&A, but they must be reasonable in scope, geography, and duration to be enforceable — and fair. Here’s how to approach them:
Duration: 12 to 24 months is typical. Anything longer should come with additional compensation.
Geographic scope: Limit to regions where the business operates or has customers.
Industry scope: Avoid overly broad language that could prevent you from working in adjacent or unrelated sectors.
Non-solicit clauses: Ensure you can hire former team members after a reasonable period (e.g., 12 months).
In some cases, founders have successfully negotiated a “carve-out” allowing them to invest in or advise non-competing startups. This is especially important for serial entrepreneurs.
5. Protect Your Team — Early and Explicitly
Founders often feel a deep sense of responsibility to their team. If the buyer is asking you to stay, use that leverage to advocate for your people:
Retention bonuses: Negotiate a pool for key employees, tied to post-close milestones.
Equity conversion or acceleration: Ensure existing equity holders are treated fairly in the transaction.
Employment guarantees: While rare, some buyers will agree to retain key staff for a defined period.
As we noted in Sell Website: Success After The Closing, post-close success often hinges on team continuity. Buyers who understand this are often open to structured retention plans.
6. Use the LOI Stage to Set the Tone
Many founders wait until the definitive agreement stage to raise these issues — a mistake. The Letter of Intent (LOI) is your best opportunity to outline high-level expectations around your role, compensation, and non-compete terms.
As we explain in Completing Due Diligence Before the LOI, the LOI stage is also when you have the most leverage. Once exclusivity is granted, your negotiating power diminishes.
7. Bring in Experienced Advisors Early
These negotiations are nuanced and emotionally charged. A seasoned M&A advisor can help you:
Benchmark compensation and non-compete terms
Model post-close scenarios and tax implications
Coordinate with legal counsel to ensure enforceability and fairness
Maintain deal momentum while protecting your interests
At iMerge, we’ve guided founders through hundreds of software and technology transactions. We understand how to balance founder protections with buyer expectations — and how to structure deals that work for both sides.
Conclusion
Staying on post-acquisition or signing a non-compete doesn’t have to mean giving up control or future opportunity. With the right strategy, you can negotiate terms that reward your contributions, protect your team, and set the stage for a successful transition — or a graceful exit.
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.
AI Training Data and M&A Risk: What Founders and Acquirers Need to Know
As artificial intelligence continues to reshape the software landscape, a new class of due diligence questions is emerging—particularly around how AI models are trained. For founders and CEOs of AI-driven companies, one question looms large during M&A discussions: Could training your AI model on copyrighted or web-scraped content create legal or valuation risks during or after an acquisition?
The short answer is yes. And the implications can be material—both in terms of deal structure and post-close liability. In this article, we’ll explore how training data provenance affects M&A due diligence, what buyers are looking for, and how sellers can proactively mitigate risk.
Why Training Data Matters in M&A
In traditional software M&A, diligence focuses on code ownership, customer contracts, and financial performance. But in AI transactions, the model itself—and the data used to train it—becomes a core asset. If that data includes copyrighted material or was scraped from the web without proper authorization, it can raise red flags for acquirers, especially those with public market exposure or institutional LPs.
Buyers are increasingly asking:
Was the training data obtained legally and ethically?
Does the company have documentation of data sources and licenses?
Could the model’s outputs infringe on third-party IP rights?
Are there any pending or foreseeable legal challenges related to data use?
These questions aren’t theoretical. In recent years, lawsuits have been filed against AI companies for allegedly using copyrighted images, text, and code in training datasets. While the legal landscape is still evolving, the risk is real—and buyers are taking notice.
How This Affects Deal Structuring and Valuation
From an M&A perspective, questionable training data can impact a deal in several ways:
1. Reps and Warranties
Buyers will likely require specific representations and warranties around data ownership and usage rights. If the seller can’t make those reps confidently, it may lead to carve-outs, indemnities, or even escrow holdbacks. For more on this, see our article on Mergers and Acquisitions: Reps and Warranties Negotiations.
2. Valuation Haircuts
Uncertainty around data provenance can lead to discounted valuations. Buyers may apply a risk-adjusted multiple or shift more of the purchase price into contingent earn-outs.
3. Post-Close Liability
If a lawsuit arises after the deal closes, the acquirer could be on the hook—unless protections were built into the agreement. This is especially concerning for strategic buyers with brand exposure or public shareholders.
Case Study: A Hypothetical AI SaaS Exit
Consider a fictional AI SaaS company, “LexIQ,” which built a natural language model trained on millions of web pages, including news articles, blogs, and academic papers. The company scraped this data without explicit permission, assuming it fell under “fair use.”
During diligence, a strategic buyer’s legal team flags the issue. They determine that some of the training data likely includes copyrighted material from major publishers. As a result:
The buyer reduces the offer by 20% to account for potential legal exposure.
They require a $2M indemnity cap and a 12-month escrow.
The deal shifts from a stock purchase to an asset purchase to isolate liability.
LexIQ’s founders, who were expecting a clean exit, now face a more complex and less favorable transaction. This scenario is increasingly common in AI M&A.
What Sellers Can Do to Prepare
Founders and CEOs of AI companies should take proactive steps to de-risk their training data before entering the market:
1. Audit Your Data Sources
Document where your training data came from, how it was collected, and under what terms. If you used third-party datasets, ensure you have the appropriate licenses.
2. Segregate or Retrain Risky Models
If parts of your model were trained on questionable data, consider retraining using licensed or synthetic datasets. This can be a significant investment, but it may preserve deal value.
3. Work with Legal Counsel
Engage IP counsel familiar with AI to assess your exposure and help craft defensible positions. This is especially important if you’re preparing for a sale or capital raise.
4. Prepare for Buyer Diligence
As we noted in Due Diligence Checklist for Software (SaaS) Companies, buyers will scrutinize your IP, data, and compliance practices. Having a clean, well-documented data pipeline can accelerate the process and build buyer confidence.
How iMerge Helps Navigate AI-Specific Risks
At iMerge, we’ve advised on numerous software and AI transactions where data provenance played a pivotal role. Our team helps founders anticipate diligence questions, structure deals to mitigate risk, and position their companies for maximum value. Whether you’re preparing for a strategic exit or evaluating unsolicited offers, we bring deep experience in software M&A and a nuanced understanding of emerging AI issues.
We also help clients assess whether an asset versus stock sale structure is more appropriate given potential liabilities—an increasingly relevant consideration in AI deals.
Conclusion
As AI becomes more central to software M&A, the legal and ethical sourcing of training data is no longer a back-office concern—it’s a boardroom issue. Founders who address it early can preserve deal value, reduce friction, and build trust with acquirers. Those who ignore it may find themselves negotiating from a position of weakness.
Use this insight in your next board discussion or strategic planning session. When you’re ready, iMerge is available for private, advisor-level conversations.
How to Protect Your Company’s Secrets During M&A Talks with a Competitor
It’s a scenario that keeps many founders up at night: a larger competitor expresses interest in acquiring your company, but you can’t shake the feeling that their real motive is to peek under the hood. In the software and technology sectors—where proprietary code, customer data, and product roadmaps are often the crown jewels—this concern is not only valid, it’s increasingly common.
So how do you engage in serious M&A discussions without giving away the very assets that make your company valuable?
This article outlines the key precautions founders and CEOs should take before sharing sensitive information with a prospective buyer—especially when that buyer is a direct or adjacent competitor.
1. Understand the Risk: Why Competitors Initiate “Fake” M&A Talks
Not all acquisition interest is genuine. In some cases, a competitor may initiate discussions to:
Gain insight into your product roadmap or IP strategy
Understand your customer acquisition channels or pricing model
Benchmark your performance metrics against their own
Preemptively neutralize a rising threat in the market
While most acquirers act in good faith, the risk of misaligned intent is higher when the buyer is a strategic competitor. That’s why your information-sharing strategy must be carefully staged and legally protected.
2. Use a Two-Stage Diligence Process
One of the most effective ways to protect your company is to structure the diligence process in two stages:
Stage 1: Pre-LOI (Letter of Intent)
At this stage, limit disclosures to high-level, non-sensitive information. This might include:
Only after a signed LOI with exclusivity and deal terms should you consider sharing more sensitive materials. Even then, disclosures should be staged and monitored through a secure data room with access logs and watermarking.
3. Draft a Robust NDA—And Enforce It
Before any information is shared, insist on a well-crafted non-disclosure agreement (NDA). But not all NDAs are created equal. A strong NDA should include:
Explicit definitions of “Confidential Information”
Restrictions on use (e.g., for evaluation purposes only)
Non-solicitation clauses (to protect employees and customers)
Non-reverse engineering provisions (especially for software/IP)
Survival clauses that extend beyond the deal timeline
Firms like iMerge often work with legal counsel to ensure NDAs are tailored to the nuances of software and SaaS businesses. If a buyer pushes back on standard protections, that’s a red flag worth noting.
4. Limit Access to Sensitive IP and Code
Even in post-LOI diligence, avoid sharing raw source code or proprietary algorithms unless absolutely necessary—and only under strict controls. Consider these alternatives:
Provide code walkthroughs via screen share rather than file transfer
Use third-party code audits or escrow services to validate IP ownership
Redact or anonymize sensitive customer data in sample datasets
Before engaging deeply, do your own diligence on the buyer. Ask:
Have they acquired similar companies before? What happened post-acquisition?
Do they have a reputation for fair dealing—or for fishing expeditions?
Are they actively acquiring, or just exploring the market?
Advisors like iMerge often maintain proprietary databases of buyer behavior and can help assess whether a suitor is serious or speculative. This intelligence can be invaluable in deciding how far to proceed.
6. Use an M&A Advisor to Control the Process
One of the most effective ways to protect your company is to run a structured, advisor-led process. A seasoned M&A advisor can:
Pre-qualify buyers and filter out bad actors
Stage disclosures to align with deal progress
Negotiate NDAs and LOIs with protective language
Maintain competitive tension to discourage gamesmanship
Even with all precautions, there’s always some risk in opening the kimono. That’s why it’s important to:
Document what was shared and when
Watermark sensitive documents to track leaks
Retain legal counsel in case of NDA breach
But don’t let fear paralyze you. Many successful exits involve strategic buyers, including competitors. The key is to manage the process with discipline, not distrust.
Conclusion
Engaging with a competitor in M&A talks doesn’t have to mean exposing your company to undue risk. With the right legal protections, staged disclosures, and experienced advisors, you can explore strategic opportunities while safeguarding your most valuable assets.
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.
