IP Audit before selling the company – is it worth it?
In the technology sector, intellectual property is the foundation of real valuation during any attempt to sell shares. During transaction preparations, an IP audit shows who actually has power over the code, databases, and patents. If you are planning an Exit, you must know that gaps in papers are the shortest path to a radical price reduction by an investment fund or a competitor.
Where does the 23% drop in valuation come from?
Investors fear legal risk much more than periodically weaker financial results or a high burn rate. In July 2024, we saw a case in Katowice where the lack of one specific contract with a developer working remotely in 2019 blocked a transaction for exactly 11 business hours. During this time, the buyer, skillfully using the founders' uncertainty, negotiated a price reduction of 215,000 PLN, arguing about potential future copyright claims. Money likes silence, and gaps in IP documentation generate unnecessary information noise.
An audit performed before putting the company on the market allows you to catch such errors on your own terms, without time pressure. We then check not only the main systems but also open-source libraries and small scripts written by people who are no longer in your team of 7 specialists. Organizing these issues usually takes from 3 to 5 weeks of intense work with documents and code repositories. This is time that directly protects your margin when exiting the business and cuts the other side's negotiating arguments.
It's worth remembering that VC funds have their own checklists that are merciless to a mess in IP. If during due diligence it comes to light that 14% of a key module was written by an intern without a signed contract for the transfer of economic copyrights, the price drops immediately. The game for control over the valuation requires you, as the owner, to be the first to know the weak points of your structure. (In July 2024, we saw this with our own eyes during an audit of a fintech company).
Gaps in IP documentation give the other side hard arguments to drive down the price during negotiations.
Three critical points in B2B contracts
A key element of every audit is verifying the economic copyright transfer clauses in contracts with contractors. In 12 out of 15 IT companies we analyzed last quarter, B2B contracts contained errors in defining the moment the rights passed to the company. The hard facts are these: if you don't have a correct clause on the transfer of rights at the time the work is created or the invoice is paid, the code could legally still belong to the programmer. The buyer's lawyers use these shortcomings to force additional financial guarantees (escrow) or lower the valuation.
The second element is the evidence of industrial property and trademark protection in the markets where you actually operate. Registering a logo in the patent office costs about 1,400–2,800 PLN, but its absence when selling a company worth several million PLN simply looks unprofessional. During a 9-day review, we check if all patent filings are current and paid according to schedule. This builds an image of a tight share structure and conscious management of intangible assets, which every CFO appreciates.
The third point is verifying clauses regarding non-competition and company secret protection after the end of collaboration. It often turns out that contracts from 2021 are too general and do not protect your IP from use by former employees in their new projects. An IP audit reveals these leaks, allowing for the signing of curative amendments even before starting official sales talks. Thanks to this, you avoid a situation where an investor withdraws, seeing a risk of a competitive entity being established based on your technology.
Risks associated with Open Source licenses
Investors and their technical auditors scrupulously check if your software is contaminated with copyleft-type licenses, such as GPL or AGPL. If one of the developers used such a component in 2021 without proper code isolation, your entire proprietary application may require the source code to be made public on demand. This kills the uniqueness of the solution and the intellectual value in the eyes of any fund. In one of the projects carried out in Katowice, we had to urgently rewrite 4.2% of the main module's code to save the valuation from dropping by 145,000 PLN.
Analyzing software dependencies during an IP audit reveals every such dangerous library before the investor's auditors arrive. This gives founders time for a technical fix of errors or to prepare a sensible justification for why a given component was used and how it is separated from the rest of the system. Technical documentation in this regard must be ready at least 14 days before the planned start of price negotiations so as not to raise suspicions about hiding product defects.
A tight share structure requires full transparency regarding the external tools used. Often founders do not know that their team uses free tools that have a clause in their terms and conditions granting rights to data to the service provider (SaaS). An IP audit maps all these touchpoints and allows for the renegotiation of contracts with providers or switching to tools that guarantee full data ownership. These are hard data that no technical auditor on the buyer's side will argue with.
Contaminating code with a GPL license can destroy a company's technological value overnight.
Production process documentation and logs
The credibility of IP ownership is confirmed not only by contracts but also by the history of commits in repositories like Git. The buyer's auditors check if the dates the code was created match the periods of validity of the contracts with the individual creators. If the logs show high developer activity in March 2022, and the contract with him was only signed in May, a legal gap arises. Money likes silence, and such a discrepancy in dates is an ideal pretext for questioning the legal cleanliness of the entire repository.
Proper ticket management in systems like Jira also constitutes an element of an IP audit. Every function in the code should be reflected in a task order, which constitutes additional evidence that the work was performed at the request and cost of the company. We verify if these systems are consistent with financial documentation and invoices issued by external contractors. Such a level of order in operational documentation increases the board's credibility and shows that the company is ready for a professional Exit without hidden risks.
We also check issues of web domain ownership, SSL certificates, and cloud computing accounts (AWS, Azure). It often turns out that key accounts are registered to the private email addresses of former partners or employees, which in 2023 led to the paralysis of one Katowice company for 3 days during the finalization of a contract. Moving these assets to company accounts is a simple step that, however, must be done before the investor starts examining the company so as not to raise unnecessary questions.
How to plan an IP audit before an Exit?
Preparing the IP layer for sale is a process that usually lasts 42 business days. The first step is a reliable inventory of all people who had access to the source code during the last 4 years of business. Next, we verify invoice payments, because in Polish law, a lack of timely payment can in certain situations be the basis for questioning the effectiveness of the copyright transfer. These are specific numbers and dates that must match in every spreadsheet presented to an investor.
Protecting shares starts with order in documents. If you are planning to sell the company within the next 10 months, an IP audit is an investment that pays off at the first round of questions from the buyer's lawyers. It allows you to avoid nervous corrections the night before signing a term-sheet and gives you confidence during tough price negotiations. A well-prepared technology company is one where every byte of data and every line of code has a clearly defined owner in folders with contracts.
Remember that business diplomacy is about eliminating fields of attack before the opponent notices them. Clean IP is the strongest shield you can possess as a founder. Our experience shows that companies with organized IP documentation close sales processes on average 31 days faster than those that have to patch gaps during due diligence. Hard facts don't lie—order in law is real profit in your bank account after the transaction is finalized.
Companies with organized IP close sales processes 31 days faster.
