Who Owns the Code? IP Issues in Tech Business Acquisitions

When a technology company is acquired, one of the most critical-and often most overlooked-aspects of the transaction is intellectual property (IP) ownership. Particularly in software and tech-heavy businesses, code is the company's core asset. Understanding who owns the code and under what legal conditions is essential for risk mitigation, valuation accuracy, and future scalability.

Why IP Ownership Matters in Tech Acquisitions

In technology business acquisitions, ownership of intellectual property is not just a checkbox. It's a determining factor in:

Valuation of the business
Ability to enforce or defend IP rights
Freedom to operate post-acquisition
Avoiding future litigation or licensing issues

A buyer must be assured that they are acquiring clean and unencumbered rights to the software and other IP assets. If not, they may face costly legal disputes or discover that core assets are unusable due to third-party claims.

Common Intellectual Property Types in Tech Companies

Before evaluating ownership, it's important to identify the types of IP involved. In tech M&A transactions, this typically includes:

Source code and object code
Patents and patent applications
Trademarks and branding assets
Trade secrets and proprietary algorithms
Technical documentation
Databases and schemas
Licensing agreements (open-source and proprietary)

Each of these can carry different risks and ownership pitfalls depending on how they were created, maintained, and distributed.

Key Legal Pitfalls in Software IP Ownership

1. Employee and Contractor Contributions

Ownership of software developed by employees or contractors can hinge on how the engagement was structured.

Employees: Typically, work done "within the scope of employment" belongs to the employer. But if employment agreements lack proper IP assignment clauses, disputes can arise.
Contractors: Independent contractors do not automatically assign IP rights unless specifically agreed upon in writing. Without a well-drafted IP assignment agreement, the contractor may retain ownership.

Due diligence tip: Always review employment and contractor agreements for "work-for-hire" and assignment language.

2. Use of Open-Source Software

Open-source software (OSS) introduces another layer of complexity. While free to use, OSS licenses can contain restrictions that affect the ownership and commercialization of derivative works.

Copyleft licenses (like GPL) require that modified versions also be open-sourced.
Permissive licenses (like MIT or Apache) are more flexible but still impose attribution or notice requirements.

Red flag: Failing to comply with OSS license terms may expose the acquiring company to infringement claims or forced disclosure of proprietary code.

3. Prior Business Relationships or Joint Development

If software was created as part of a joint venture, partnership, or client engagement, then multiple parties might have joint ownership or usage rights. Ownership must be clarified before a buyer can obtain exclusive control.

Questions to ask include:

Was the code developed under a contract with a third party?
Was there a co-development agreement?
Did any customers or collaborators fund or influence the software design?

M&A Due Diligence for Code and IP Ownership

Tech M&A due diligence should include a thorough audit of IP assets, with a focus on:

Chain of Title - Is there documentation tracing ownership from creation to current holder?
Assignment Agreements - Are there properly executed agreements with all employees, contractors, or contributors?
License Reviews - Are third-party software components documented, and are their licenses compliant?
Patent Portfolio - Are any patents pending or granted? Who is the named inventor, and are rights assigned?
Trade Secret Protections - Are policies and safeguards in place to protect confidential algorithms or data?

Best Practice: Include IP Representations and Warranties in the Purchase Agreement

To protect both the buyer and the seller, tech acquisitions should include robust representations and warranties regarding:

Ownership of IP
Absence of infringement claims
Validity and enforceability of IP rights
Compliance with licenses (including open-source)

Breach of these warranties may result in indemnification obligations post-closing.

Strategies for Securing IP Ownership Before Acquisition

Tech companies that are preparing for acquisition-or simply want to operate with less risk-should take proactive steps to secure intellectual property ownership long before they enter negotiations.

1. Clean Up IP Agreements

Conduct an internal audit of all contributor agreements. This includes:

Employee contracts: Ensure they include clear IP assignment clauses and confidentiality provisions.
Contractor agreements: Include work-for-hire language and a present assignment of IP, not just a promise to assign.
Founder contributions: Founders must assign all their pre-incorporation work to the company through formal documentation.

Tip: Avoid relying solely on NDAs. Without assignment clauses, NDAs alone don't transfer ownership.

2. Implement an Open Source Software (OSS) Policy

Before using any open-source code:

Develop a formal OSS policy.
Use tools to track and manage OSS components.
Document all third-party software, licenses, and usage terms.

This policy should also address review and approval workflows, especially for developers integrating third-party libraries.

3. Protect Trade Secrets and Proprietary Know-How

Many tech companies depend on trade secrets: algorithms, source code, client data, and internal processes that are not patented or published.

To preserve trade secret protections:

Require NDAs for all employees and vendors.
Limit access to sensitive information using technical and procedural controls.
Train employees on trade secret handling and confidentiality.

Loss of trade secret protection can significantly reduce a company's value during acquisition.

4. Register Trademarks and Consider Patent Filings

While not all software is patentable, if your product includes a novel method or process, consult with an IP attorney to assess patent eligibility. Meanwhile, registering trademarks early protects your brand and reduces future rebranding risks during an acquisition.

What Buyers Should Require in a Tech Acquisition

From the buyer's side, comprehensive due diligence is only part of the equation. You should also:

Require IP indemnification clauses.
Ensure escrow of source code in case the seller's business is disrupted.
Evaluate non-compete and non-solicitation clauses for key personnel.
Confirm assignment of domain names, Git repositories, and hosting accounts.
Request a full IP schedule listing all owned and licensed intellectual property.

When IP Ownership Is Disputed or Unclear

Disputes over code ownership can stall or kill a deal. Common solutions include:

Negotiated licenses: Granting limited rights to continue using the disputed IP.
Escrow agreements: Holding code in escrow until rights are clarified.
Assignment with indemnity: The seller assigns questionable IP and indemnifies the buyer for future claims.
Repurchase rights: The seller agrees to buy back IP if legal challenges arise post-sale.

Working with a knowledgeable attorney early on can help structure these solutions to protect both parties' interests.

Real-World Scenarios That Raise Ownership Red Flags

Consider these real-world examples of situations that can lead to IP disputes in tech acquisitions:

A startup built its MVP using a freelance developer overseas-with no written contract.
Co-founders split after the initial launch, and one continues to host the codebase.
An AI company trained its model using customer-provided data without clear consent.
A SaaS platform integrated multiple open-source libraries without tracking their licenses.

In each case, unclear or incomplete documentation of ownership can jeopardize the entire transaction.

Contact an Intellectual Property Attorney for Tech Acquisitions

Whether you are a startup preparing to scale, an investor performing due diligence, or a company navigating a merger, securing clean IP ownership is essential. At Heritage Law Office, we help businesses identify, document, and protect intellectual property rights before, during, and after tech acquisitions.

Contact us today by calling 414-253-8500 or using our secure contact form to schedule a consultation.

Frequently Asked Questions (FAQs)

1. What does "clean IP" mean in a tech acquisition?

Clean IP refers to intellectual property-especially software code-that is clearly owned by the selling company without third-party claims, licensing issues, or unclear contribution histories. This means all contributors have assigned their rights to the company, any third-party code is properly licensed, and no ongoing disputes exist. Clean IP reduces legal risk for buyers and increases company valuation.

2. Can open-source code impact the ownership of proprietary software?

Yes. The use of open-source code, particularly under restrictive licenses like GPL, can impose obligations such as making your own source code public. This can impact the ability to commercialize software or even invalidate ownership claims if the license terms are violated. Proper due diligence and an open-source compliance policy are crucial.

3. Who owns software created by independent contractors?

By default, independent contractors own the IP they create unless a written agreement assigns those rights to the company. Without an IP assignment clause, the contractor may retain ownership of code or other deliverables, which can become a major issue in acquisitions or licensing.

4. How does a buyer verify software IP ownership in an acquisition?

A buyer typically conducts IP due diligence, which includes reviewing employment and contractor agreements, license records, contribution logs, copyright and trademark registrations, and chain-of-title documentation. Any red flags, such as missing assignments or improperly licensed code, should be addressed before closing.

5. What happens if IP ownership is unclear at the time of acquisition?

If IP ownership is unclear, it can delay or derail a transaction. Buyers may require indemnification clauses, escrow arrangements, or assignment agreements to address the risk. In some cases, buyers may reduce the purchase price or walk away entirely if ownership cannot be resolved.