Introduction
India’s startup ecosystem has reached new heights with unprecedented venture capital inflows and a growing appetite for mergers and acquisitions (M&A). Many founders cherish the unique moment a startup is acquired, whether by a strategic investor, a tech behemoth, or a private equity fund.
When a buyer comes to the table, they are not just acquiring customers, employees, or revenue; they are acquiring the intellectual property (IP) you hold. Whether it’s the brand people remember, the proprietary algorithm you own, or the lines of software code that constitute the technology underlying your product, IP assets are the crown jewels of any acquisition.
However, in practice, IP is often the Achilles’ heel of startups. Gaps in ownership, missing assignments, expired registrations, or sloppy open-source software usage have sabotaged high-value transactions more often than not. While India has a developed and widely practiced body of IP law, the principles of compliance among startups remain a work in progress. It is no longer enough for founders to stick their heads in the sand and hope for the best.
This article provides a practical, first-principles checklist for founders considering a sale. It analyzes the Indian IP regime, delineates common mistakes, proffers best practices to maximize valuation, and outlines how to avoid deal-breakers.
Intellectual Property in the Indian Legal Framework
- Trademarks: The Trade Marks Act, 1999, governs trademarks in India. A trademark registration grants nationwide exclusivity and statutory remedies against infringement. Trademarks include, but are not limited to, names, logos, slogans, trade dress, and domain names. Without registration, protection is restricted to “passing off” actions, which are significantly harder to prove and enforce.
- Copyright: The Copyright Act, 1957, automatically protects literary and artistic works, including software code. While copyright registration is not compulsory, it serves as crucial evidence of ownership in case of an infringement dispute. For instance, Section 17(c) of the Act addresses potential ownership confusion by clarifying that works created by an employee during their employment are typically owned by the employer, as stipulated in their contract.
- Patents: The Patents Act, 1970, is the governing law for patents, which protect inventions that are new, involve an inventive step, and are capable of industrial application. By default, the inventor is the owner unless the rights are assigned to the company. Such assignments must be made in writing, and the company must record them with the Controller of Patents.
- Designs: The Designs Act, 2000, protects industrial designs. Elements like shape, pattern, configuration, and even Graphical User Interfaces (GUIs) can be protected upon registration under the Act. This protection is often a key competitive advantage in industries where consumer attention is driven by design.
- Trade Secrets: Unlike other forms of IP, trade secrets in India are not protected by a specific statute. Instead, they are safeguarded through contracts, non-disclosure agreements (NDAs), and common law principles. The courts have consistently upheld the principle of confidentiality, as illustrated in the landmark case of John Richard Brady v. DCM Ashish (Delhi HC, 1987), which affirmed legal protection for confidential business information.
A Practical Checklist for Founders
1. Inventory All IP Assets
Maintain a comprehensive record of all registered, pending, and unregistered IP, including:
- Trademarks
- Copyrights (including software, marketing materials, and UI designs)
- Patents and pending applications
- Industrial designs
- Domain names and social media accounts
- Trade secrets (such as algorithms, databases, and proprietary formulas)
2. Verify Ownership and Assignments
- Ensure that all employees, founders, and contractors have signed agreements assigning their IP rights to the company
- Rectify any IP registrations that were incorrectly filed under personal names instead of the company’s name.
- Execute new assignment deeds to close any historical gaps in the chain of title.
3. Apply for and Renew Registrations
- Apply for protection of core trademarks and patents before initiating acquisition discussions.
- Renew any lapsed rights, as expired IP can reflect poor management to a potential buyer.
- Record all assignments with the appropriate Registrar to ensure the company, not an individual, is listed as the registered owner.
4. Review Open-Source and Third-Party Licenses
- Perform a Software Bill of Materials (SBOM) audit to identify and track all open-source components used in your technology.
- Ensure full compliance with the terms of all licenses (e.g., GPL, Apache, MIT).
- Non-compliance can trigger “copyleft” provisions, potentially forcing the release of proprietary source code into the public domain—a scenario most buyers are keen to avoid.
5. Implement Protective Measures for Trade Secrets
- Identify and classify all proprietary information, such as unique algorithms, pricing models, or customer databases.
- Use NDAs, robust confidentiality clauses in employment agreements, and restrictive access protocols to secure them.
- Be prepared to provide proof of these security measures, as buyers will often request it.
6. Resolve Existing Conflicts
- Identify and disclose any ongoing or potential IP disputes, oppositions, or litigation.
- Whenever possible, settle these disputes before entering advanced deal negotiations.
- Unresolved litigation can lead to a lower valuation, purchase price adjustments, or specific indemnities in the acquisition agreement.
7. Organize Documents for Due Diligence
Prepare a “diligence-ready” IP portfolio that includes:
- Registration certificates.
- Assignment deeds and license agreements.
- Template employment and confidentiality agreements.
- Technical documentation (e.g., diagrams, source code repositories).
- Proactivity here can significantly speed up negotiations and build buyer confidence.
Common Red Flags in M&A Due Diligence
- Unregistered or expired core IP rights.
- IP created by employees or contractors that has not been formally assigned to the company.
- Company trademarks or patents owned personally by one or more founders.
- Incomplete or inconsistent chains of title for registered IP.
- Non-compliance with open-source software licenses.
- Undisclosed liens or encumbrances on IP assets (e.g., from bank loans).
- Inadequate protection for trade secrets (e.g., lack of NDAs and confidentiality protocols).
Any of these red flags can lead to a reduced valuation, demands for specific indemnities, or even the collapse of the deal.
Conclusion
In an acquisition, intellectual property is not incidental; it is a benchmark of value and risk. A well-structured IP portfolio signals strong governance and market readiness, while gaps in registration, ownership, or compliance will adversely affect the deal’s valuation and risk assessment.
Proper IP management is both an enabler and an obligation. It enhances valuation and smooths negotiations but demands timely registrations, clear assignments, and strict compliance. India’s legal framework is equipped to protect innovation, but its effectiveness in a transaction depends on how diligently founders align their IP strategy with statutory and contractual requirements.
In the M&A landscape, intellectual property remains the gateway through which opportunity and valuation are ultimately judged.