Fundraising and Intellectual Property: What Investors Check

Fundraising, a rite of passage for start-ups

It is the holy grail of any start-up wishing to continue its development: raising funds. More concretely, it means seeking investors or institutions willing to invest in the start-up's capital.

Whatever the type of round (pre-seed, seed, series A, B or C), the investor will examine the start-up to make sure its business model is viable and, also, that it is legally sound. Having often acted as a lawyer on the investor side, I can say the legal side should not be neglected. This is all the more true for the intellectual property aspects of innovative start-ups.

Learn more about intellectual property law.

What investors actually scrutinise

Whether it is the ownership of trademarks, creations and software, or employment contracts and those with freelancers, the investor's lawyer will go through everything. At the slightest red flag, the amount of the investment takes a hit, or the round collapses altogether.

The most common IP red flags

These are the situations I come across most often in an IP due diligence:

• The trademark not filed or badly filed: the start-up has invested in a name since its creation, but it was never registered with the INPI. Or worse, it is filed in the name of a founder as an individual rather than in the company's name. If the name conflicts with a pre-existing trademark, the round can be jeopardised overnight.
• Source code without an assignment agreement: freelance developers or a CTO contributed to the product without signing a copyright assignment. Legally, they remain the owners of their contributions, a major risk for investors.
• Incompatible open-source licences: some licences (GPL-type) require the entire code that incorporates them to be made public. An investor who finds this in the proprietary code of a SaaS may legitimately worry about the product's valuation.
• The domain name in a founder's personal name: a small detail in appearance, a real alarm signal for an investor who wants to make sure all assets belong to the company.

Experience on both sides of the table

As I am often asked to advise investors before they put money into a start-up, I developed a course on intellectual property audits, which I have taught at the University of Montpellier (Master Accords et Innovations) for several years.

I am therefore familiar with the legal issues and concerns on both sides, which makes it possible to anticipate what the opposing lawyer will look for during the due diligence.

Preparing a fundraising?

An IP audit beforehand can make a difference. Contact me to discuss it.

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