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.