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Series A Legal Preparation for Technology Start-ups

The Legal Problem

Series A due diligence is the most consequential legal audit a technology start-up will face before an exit. Institutional venture capital investors conduct detailed IP chain of title reviews, founder and employee agreement audits, open-source license compliance assessments, and regulatory compliance checks before committing capital. Defects discovered during due diligence delay closings, reduce valuations, and sometimes kill deals.

The five most common Series A deal-killers for technology start-ups are: missing or defective IP assignment agreements; open-source license exposure in the core product; inventorship errors in pending patent applications; prior employer IP claims against a founder's core technology; and inadequate founder vesting structures that make the company uninvestable from an investor protection standpoint. All five are preventable with proper legal infrastructure at formation.

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The IP chain of title audit looks for breaks in the chain between the person who created the technology and the company that claims to own it. The most common break is the contractor who wrote core code under an oral agreement — or under a written agreement that did not include an IP assignment clause. Under U.S. copyright law, a work made for hire by an independent contractor requires a written agreement designating the work as a work made for hire, or a separate written assignment. Oral agreements and unsigned contracts do not transfer copyright.

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