Technology Start-up Due Diligence

Technology start-up due diligence with emphasis on the patent rights will produce a more accurate assessment of the value and risk.

Intellectual property rights frequently form the foundation of a technology start-up company. Patent rights provide a means for entry into a marketplace by creating a barrier to competitors. As a result, a potential investor in a technology start-up company should conduct a thorough analysis of the Intellectul Property rights owned by the company, with particular emphasis on patent rights, as part of the investor's pre-investment due diligence.

The due diligence enables the investment company to assess the value of the business and the associated risks, and will increase the likelihood of a successful investment. The followings are our due diligence methodology:

Patent Portfolio Review - The level of evaluation of a patent portfolio during due diligence usually depends on the amount of the investment and the perceived importance of particular patents. The following will be performed:

1. The expiration dates and renewal fee records of patents issued should be checked

2. Pending patent applications should be reviewed to ensure the good standing.

3. The patents and pending applications should be reviewed to determine the extent to which the patent claims preclude others from competing in the sale of the company's key commercial products.

4. Claims in the patents and patent applications should describe the company's relevant technology in a way that reflects the commercial applications used or intended to be used by the company. In other words, the company's patent portfolio strategy should be designed to protect the business of the company.

Extended Patent Portfolio Analysis - For larger investments or in situations where patents are considered crucial, the technology company's patent portfolio may be subjected to an invalidity analysis to further test the strength of the patents. The company can be queried as to its knowledge of state-of-the-art third-party patents and publications which may affect the ability of the company to secure patent protection for its own ideas. An independent search can be conducted by the investment company.

Although a company's patents may cover its commercial products, another party may have a patent that is dominating in the marketplace and is potentially infringed by the company's products. This could result in unwanted, expensive patent infringement litigation and a possible prohibition on sales of the company's products. To prevent such post-investment surprises, a freedom-to-operate or infringement risk analysis can be conducted. That type of analysis surveys the landscape of the technology field to locate relevant patents in order to assess whether the manufacture or sale of the technology company's products might be subject to the patent rights of others.

Ownership Issues – A critical consideration is ownership of the company's IP rights. Many factors may adversely affect the technology company's title to patent rights, eroding their value and ultimately the value of the business. The investment company must make sure that each employee has properly assigned to the company the employee's rights to any invention developed using company time and resources. An unbroken, written chain of title from the inventor(s) to the company must be verified for each IP, and the assignment documents should be recorded with the U.S. PTO.

The ownership of patent rights also can be affected if the invention was developed using funding from a federal agency. Under the patent laws, certain statutory provisions must be satisfied for the patent owner to perfect title.

Third-Party Agreements and Licenses – All the technology agreements and patent licenses to or from the company should be reviewed. Key license terms should be analyzed to ensure that the company retains appropriate rights, when the company is the licensor, or receives appropriate rights, when the company is the licensee. The investment company must independently verify the licensor's ownership of patent rights that are licensed to the company.

Patent Infringement Claims and Disputes - The technology company should be queried as to any actual or threatened patent infringement, IP misappropriation and ownership disputes. Cease and desist letters, offers for licenses and other similar correspondence to or from 3rd parties should be reviewed and assessed. IP litigation is a costly proposition both in terms of financial and human resources.

Trade Secrets - The technology companies mostly rely on internally developed products and tools that lead to new products. Because patents directed to methods of conducting research are difficult to enforce, a technology company may decide to protect the technology as a trade secret. Patent protection typically is the more prudent way to proceed, as it prevents a company from being blocked from practicing its own technology if a 3rd party independently develops and patents the same idea. However, protection as a trade secret potentially permits the company to practice the technology in perpetuity without the limitation of a patent term.
InnoVest Group uses 3rd party entities to conduct due diligence review of an IP portfolio. This enable us to assess more accurately the inherent risks associated with an investment in a technology start-up companies and increase the likelihood of a successful and financially rewarding outcome.

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