When you’re evaluating a startup — whether for investment, acquisition, or partnership — it’s easy to get caught up in the pitch. The product looks sleek, the team sounds sharp, and the numbers might show early promise.
But underneath the surface, one thing can quietly shape the entire deal: intellectual property.
IP is often the real asset behind a startup’s valuation. It powers the product, protects the brand, and drives long-term value. But it’s also where some of the biggest risks hide.
In this article, we’ll help you spot those risks — the red flags that can disrupt a deal, hurt future growth, or lead to expensive disputes. Whether you’re a founder preparing for scrutiny or an investor looking to protect your downside, these insights will give you the confidence to see what others miss.
Let’s take a closer look at what to watch out for — and why catching these issues early makes all the difference.
Why IP Is a Silent Deal-Maker or Deal-Breaker
The Weight of IP in Early-Stage Startups
For most startups, the core value lies in what they’ve built — not in factories or stockpiles, but in code, branding, designs, and know-how. All of that lives under the umbrella of intellectual property.
That’s why investors and acquirers look closely at it during due diligence. They want to understand if the IP is real, owned, and strong — or if it just looks good from a distance.
In many cases, the startup’s IP is the only real asset. If it’s flawed or disputed, the risk is enormous. That’s why spotting red flags matters so much before a deal goes forward.
What Happens When IP Isn’t Solid
It’s not always obvious when something’s wrong. A product might work perfectly. The startup might have users, revenue, and momentum. But under the hood, ownership can be messy, protections might be missing, and past work might not be properly documented.
When these problems show up after a deal closes, they don’t just slow things down — they can wreck the entire outcome.
That’s why due diligence teams must dig deeper. Not just into what the startup has, but into how it was built, who owns it, and how secure those rights really are.
IP Ownership: The First Layer of Risk
Who Actually Owns the Core Assets?
This is the first question to ask, and surprisingly, it’s one of the most common red flags in startup deals.
If a founder built the original code or wrote the brand copy before the company was legally formed, there must be a clear assignment document transferring those rights into the business.
Without that, the IP may still belong to the individual — not the startup. That puts future ownership, licensing, and protection at risk.
It also affects valuation. If the startup doesn’t own its core IP, what exactly is it selling?
Contractor and Employee Contributions
Startups often rely on outside help — contractors, freelancers, and agencies — especially early on. But unless those people signed proper IP assignment agreements, the rights to their work may not belong to the company.
Many founders assume that paying for work means they own it. But that’s not how IP law works.
Without a written agreement assigning rights, the default ownership often stays with the creator. That can lead to serious legal challenges down the line — especially if that person later disputes their role or value.
Incomplete or Missing Agreements
Another red flag: signed agreements that are vague, incomplete, or inconsistent.
For example, a contractor agreement might mention payment terms but say nothing about IP rights. Or an employment contract might lack a standard IP assignment clause altogether.
During diligence, ask for copies of every agreement tied to creation — not just for full-time employees, but for interns, contractors, and vendors.
One missing agreement can cast doubt on the entire portfolio.
IP Protection: Where Gaps Often Hide
Filed vs. Claimed
Startups often say they have “patented technology” — but when you check, there’s no granted patent. Sometimes, there’s not even a pending application.
Claiming IP without documentation is a major red flag. Investors need to see actual filings, with status updates and filing numbers. Not just promises.
Provisional patents are common in early-stage deals. That’s fine — but there should be a plan to convert them, and the filings should align with the company’s actual product.
If the IP claims don’t match what’s being sold, that’s a mismatch that signals trouble.
Weak or Narrow Scope
Even if a patent exists, it doesn’t always offer meaningful protection.
Some filings are so narrow they’re easy to work around. Others are written in vague language that’s hard to enforce.
A smart due diligence team will review the scope of protection. Does the patent really block competitors? Or is it just a line item with little teeth?
Similarly, with trademarks, check what’s registered — and where. If the company operates globally but only holds a trademark in one country, that’s a gap that needs attention.
Expired or Abandoned Rights
Another common problem is failure to maintain IP.
Patents and trademarks require ongoing fees and renewals. If those aren’t paid on time, rights can lapse — sometimes without the founders even knowing.
Ask for proof that filings are current. Look for maintenance schedules. Check whether filings have been contested, challenged, or opposed by others.
Neglecting IP upkeep is a sign of poor internal controls — and can hint at other legal or operational blind spots.
Trade Secrets and Confidentiality Practices
How Trade Secrets Are Protected
Not all valuable IP is registered. Some of the most important assets are trade secrets — algorithms, pricing models, client data, and internal processes.
But trade secrets only stay protected if they’re treated as such.
That means limited access, encryption, employee NDAs, and clear internal policies. If a startup claims to have “proprietary” tech but can’t show how it protects that information, it’s a red flag.
Lack of process here suggests the secret could walk out the door with the next employee.
Leaks and Departures
During diligence, find out what happens when someone leaves the company.
Did they sign a confidentiality agreement? Was there an exit interview? Are there records showing return or deletion of confidential material?
High turnover without controls around trade secrets increases the chance of leakage — and that can create future litigation, especially if the IP shows up at a competitor.
Ask about any past disputes with ex-employees. Sometimes the best way to uncover risk is by looking at what already went wrong.
Licensing and Third-Party Rights
Unclear Inbound Licensing
Many startups build on top of existing tools, open-source libraries, APIs, or licensed data. This is normal — but it becomes a red flag if they don’t understand or manage those licenses properly.
Some licenses are permissive. Others come with restrictions. If the startup uses third-party content or code under the wrong license — especially one that requires public disclosure or limits commercial use — it can expose the entire product to risk.
During due diligence, ask for a complete list of external software, data, or IP used in the product. Then confirm the license terms, and whether they match the business model.
If it’s not clear who approved the use — or no one on the team can explain what the license allows — that’s a problem.
Overlooked Restrictions and Dependencies
Startups often sign early-stage deals to move quickly — including agreements with partners, suppliers, or distributors that touch IP.
But those early deals might contain restrictions that hurt long-term growth.
For example, the startup may have given a reseller exclusive rights in a key market. Or they may have promised co-ownership of future improvements. Or perhaps they licensed their tech out too broadly without realizing the long-term impact.
These decisions are sometimes made when the company is small and trying to survive — but they don’t always scale well. If they’re buried in contracts and not disclosed, they can derail negotiations later.
Always look closely at anything that sounds like a “strategic partnership.” Those deals often carry hidden IP commitments.
Exclusive vs. Non-Exclusive Licensing
Another common red flag is when a startup gives exclusive rights to IP too early.
An exclusive license to a single customer, even if it’s short-term, can block future deals or slow down scale.
Worse, if the startup can’t legally get that license back or revoke it, they may lose control over their most valuable asset.
Non-exclusive licenses, on the other hand, can be structured to give flexibility — but still require clear tracking and limits on use.
During diligence, make sure all licensing agreements are reviewed not just for legality, but for business impact.
Branding and Trademark Pitfalls
Unregistered Brand Names
Startups love strong branding — but many skip trademark filings. Instead, they assume that owning a domain name or social handle is enough.
It isn’t.
If the company hasn’t filed for trademark protection, their brand name might be legally vulnerable. Someone else could claim it — or worse, already own it.
A quick check of registered trademarks in core markets can reveal major conflicts. If someone else owns a similar name in the same industry, the startup might have to rebrand — even after launching.
That’s a massive risk to investor value. Branding problems get expensive fast.
Trademark Conflicts in Other Countries
Startups that plan to expand internationally need to think globally from day one.
A name that’s clear in one country might already be taken somewhere else. And that creates problems — especially if international growth is a key part of the pitch.
Check for registered trademarks in target regions. If the startup hasn’t done this, it’s worth flagging as an area to fix.
Waiting until expansion begins is too late. By then, the damage is already done.
Inconsistent Use Across Channels
Another red flag is when a startup’s brand appears in slightly different versions across products, websites, investor decks, and packaging.
Maybe they change fonts, alternate between spellings, or use outdated logos. This might seem like a design issue — but it has legal consequences.
Trademark protection depends on consistent, commercial use. If the company uses too many versions of its brand, it weakens the ability to enforce rights — or defend against copycats.
This kind of inconsistency also signals that the startup hasn’t thought seriously about brand protection. That’s something investors and acquirers notice.
Litigation, Disputes, and Infringement Risk
Ongoing or Recent Lawsuits
If the startup is currently in an IP-related lawsuit, or just settled one recently, it deserves close scrutiny.
Find out what the case was about, how it was resolved, and whether any rights were transferred, limited, or encumbered.
Sometimes a settlement includes restrictions that affect future use or expansion. Other times, the company may have paid damages or agreed to stop selling a feature.
This history matters, especially if the same risk could arise again. Repeat infringement claims often suggest a structural problem.
If the startup has multiple disputes in a short period — even small ones — that’s a sign of trouble.
Undisclosed Cease-and-Desist Letters
Not all conflicts go to court. Sometimes startups receive warnings — cease-and-desist letters from competitors or brand owners — and never disclose them during early talks.
They might ignore them or settle quietly without telling investors.
But these letters are often the first sign of a brewing legal issue.
Ask directly whether the company has received any such notices. If the answer is yes, follow up with what was done in response — and whether the issue was closed for good.
Silence or vagueness here is a red flag. If they’ve had past warnings, there could be more ahead.
Similar Products Already in Market
Finally, it’s important to look around.
Are there other products on the market that look, sound, or work just like the startup’s? If so, did the startup do a freedom-to-operate review? Can they explain how their IP makes them different?
If the product is easy to copy — and there’s no protection — the business might not be as unique as it seems.
Investors and acquirers need to understand how much of the value lies in differentiation. If the IP isn’t strong enough to back that up, the whole model could be at risk.
Weak IP Strategy Signals Operational Risk
No Clear IP Ownership Policy
Many early-stage startups run fast and build fast. That’s great for momentum, but risky for intellectual property.
If the company doesn’t have a clear internal policy for IP ownership, it means there’s no consistent process for who owns what.
That can lead to confusion down the road — especially if employees, contractors, or advisors contribute to products without signing the right paperwork.
During diligence, ask how the company handles IP created by the team. If the answer is “we’ve never had a problem,” that’s not a policy — that’s a gap.
What you want to hear is that there’s a standard agreement in place and that it’s used every time.
Lack of Central IP Tracking
Another sign of weakness is when the startup doesn’t know what it owns — or can’t prove it.
If they have to search multiple folders, guess which version of a filing is current, or rely on memory for key IP dates, it suggests poor tracking.
That creates two problems. First, you can’t verify the facts. Second, it shows the company isn’t ready to scale.
IP management doesn’t have to be complex. But there should be a single place — a clean folder or system — where all filings, contracts, and correspondence are tracked.
When that doesn’t exist, mistakes are inevitable.
No Strategy for Growth or Protection
Strong startups protect their ideas — not just react to threats.
If the team can’t explain how they plan to expand IP protection, file new patents, or defend their rights as they grow, that’s a red flag.
Even if they’re early, they should have a sense of what to protect next — and how it fits their roadmap.
A mature answer might include filing regionally, converting provisionals, updating trademarks, or budgeting for renewals.
An immature answer is “we’ll deal with that later.” That’s not a strategy. That’s a delay that may become a liability.
Red Flags During Founders’ Transitions
Departed Founders Without Assignments
Startups often go through changes in the founding team. Sometimes people leave before incorporation. Other times, early contributors step away before funding.
If those individuals helped build the product, brand, or IP, they need to have signed proper assignment documents. If they didn’t, they could later claim ownership — or block the sale of certain assets.
Check whether any early founder or builder is no longer active. Then confirm whether the company holds signed assignments for all their contributions.
If those documents are missing, it creates a legal gap that must be addressed before moving forward.
This is a common issue — but also one of the easiest to fix, if caught early.
Silent Equity Holders With Unclear Rights
Some early-stage companies give out equity or advisory roles in exchange for contributions. But if those people created or influenced IP, the terms of their agreement matter.
Were they just advisors? Or did they write code, build mockups, or help define the product?
If so, there should be a clear statement in writing that the company owns anything they contributed. Otherwise, they may retain moral or legal rights to it.
This is especially important if the person left on bad terms or isn’t responding. It’s easier to fix this while the deal is still being discussed — not after the investment is wired.
Signals That IP Value Is Overstated
Inflated Claims Without Evidence
Some startups build their story around “patented technology” or “proprietary AI.” But when you look closer, there’s no patent — or the tech is based on open tools available to everyone.
This is more than exaggeration. It’s a misalignment between pitch and substance.
During diligence, test every claim. Ask to see the actual filing or the unique algorithm. See how much of the product is truly owned and how much is licensed or cobbled together from third-party tools.
If the startup can’t provide real proof of ownership and originality, the value they’re selling may be built on sand.
Heavy Dependence on a Single Patent
Sometimes, the company does have IP — but it all rests on one patent.
If that patent is narrow, weak, or not aligned with the current product, it becomes a liability rather than a strength.
Ask how the patent supports the business model. What does it actually protect? Has it been challenged? How likely is it to remain enforceable?
If the startup can’t explain how the IP works — or why it gives them an advantage — that’s a red flag. Real value comes from IP that’s integrated into the business, not tacked on for show.
Patents That Don’t Match the Market
Another issue is when a startup holds patents that don’t line up with what they’re selling.
Maybe they filed early, before the product pivoted. Or maybe the filings are from a legacy idea that no longer fits the business.
Investors need to know whether the IP supports the path ahead — not just the past.
Ask how the patent relates to current features. If it’s unrelated, then it may not add value. It could even distract from a clean story or complicate future exits.
Good IP tells the same story as the product — not a different one.
What a Clean IP Record Should Look Like
Organized, Accessible, and Complete
When a startup has its IP in order, it’s easy to spot.
There’s a clean folder or data room with all relevant documents: patent filings, trademarks, copyrights, employment agreements, and contractor assignments.
Nothing feels rushed or pieced together. There are signed agreements where they should be. Filings are up to date, and deadlines are tracked. Ownership is clear, consistent, and verified.
That kind of record speaks volumes. It shows the company takes its core assets seriously. It also means you’re less likely to find unpleasant surprises after money changes hands.
The smoother the records, the smoother the transaction.
Thoughtful Protection, Not Just Paperwork
Strong IP isn’t about filing everything possible. It’s about filing the right things.
During diligence, it becomes clear when a startup has filed just to impress — versus filing based on a real strategy.
If the patents connect directly to the product roadmap, if the trademarks follow market expansion, and if the company can explain what each piece protects, that’s a good sign.
This kind of protection supports growth. It adds actual value. And it gives the buyer or investor something solid to build on.
IP isn’t just about defense. It’s part of the foundation. When that’s clear, trust builds quickly.
Alignment Between IP and Product
One of the strongest signs that a startup understands its IP is when its protection maps directly to what it’s selling.
If you look at a patent and see the core workflow behind the app, that’s alignment. If you see a trademark that matches the brand the customer sees every day, that’s alignment.
Startups that align IP with execution show maturity. They’re not just innovating — they’re protecting innovation in real time.
That kind of discipline stands out in any diligence process.
What to Do When You Find a Red Flag
Ask Questions, Not Accusations
Finding a red flag doesn’t mean the deal is over. But it does mean the conversation needs to shift.
Instead of reacting harshly, start by asking honest, open-ended questions.
When was this created? Who worked on it? Is there an agreement on file? Was this filed before or after the product launched?
Most red flags come from a lack of knowledge, not intent to deceive. And many can be fixed with the right documents or amendments.
The key is to stay focused on clarity — not blame.
Startups that respond transparently, even when issues arise, often earn more trust than those that pretend there’s no problem.
Prioritize What Needs Immediate Fixing
Not every issue needs to be solved before signing.
Some gaps can be resolved with a post-closing action. Others may require indemnities or holdbacks. But critical risks — like missing IP assignments from key contributors — should be resolved before funds move.
Prioritize red flags based on how much they impact value, transferability, or future enforcement.
The bigger the risk, the earlier it needs to be addressed. And in some cases, that means delaying the deal until the fix is done.
Don’t let urgency rush you past a major problem. If it’s core IP, it needs to be solid — or the deal can’t stand.
Document the Risk for Future Reference
If the issue is acknowledged but not resolved before closing, document it.
Include it in the deal materials, spell out what’s missing, and describe how it will be fixed later.
This protects all sides. It prevents memory loss, sets expectations, and keeps the resolution process accountable.
Good diligence doesn’t mean every issue is perfect. It means every issue is known — and either resolved or planned for.
Why Diligence Should Be an Ongoing Process
Don’t Stop After the Deal Closes
Once an investment is made or an acquisition is complete, diligence shouldn’t end. In fact, that’s often when the real work starts.
Now, it’s time to finish post-closing assignments, transfer rights, update records, and fix open issues that were flagged earlier.
This is also when the buyer’s or investor’s legal team should take over regular IP management — tracking renewals, filing expansions, and enforcing rights if needed.
Many deals look clean on paper but fall apart in execution. Keeping diligence active ensures the assets stay protected — and the value stays intact.
Help the Startup Build Better Habits
If you’re an investor, it’s in your interest to help the startup tighten their IP practices post-funding.
That might mean introducing them to better counsel, recommending tools for managing filings, or encouraging policies for documentation and NDAs.
IP discipline doesn’t happen overnight. But a little coaching goes a long way.
When startups get better at managing their own IP, they become more valuable — not just to you, but to future rounds, buyers, or partners.
That kind of improvement turns a red flag into a long-term asset.
Final Thoughts: IP Due Diligence Is About More Than Checking Boxes
Spotting IP red flags is about more than looking for missing forms or scanning patent databases.
It’s about understanding how a company protects the ideas that make it special — and whether it’s ready to carry those ideas into the future.
The best diligence combines legal knowledge with business instinct. It asks: does this startup truly own what it’s built? Can it defend it? And has it thought about protection as part of the journey — not just a last-minute scramble?
If the answer is yes, that company deserves attention. If the answer is no, there’s still time to help them get there.
Because when IP is clean, protected, and aligned, it’s not just a legal asset — it’s a reason to believe in the business.
And when you can believe in the foundation, everything built on top becomes that much stronger.
