Technology: 4 things to consider before acquiring a tech startup

When you have the opportunity to merge or acquire a company whose technology you want, make sure you know what they own, how they own it and whether they can actually give it to you

Your business needs to grow, and the opportunity to greatly expand your web presence and profit just needs the technology of an upstart company. The upstart is willing to sell. The term sheet is done; now it’s time to move forward or walk away. How can you determine with any confidence whether you are buying the next YouTube, Android or Siri—or are you buying the next Autonomy?

From a technology IP standpoint, the answer is not always easily determined. Both technology and its corresponding IP are notoriously difficult to value, quantify and characterize. Unlike financial analysis, where accounts can be tabulated and a subscriber base counted, you can’t simply count the number of trademarks or patent applications and gain useful information. The most important thing to keep in mind is that both technology and IP exist to produce revenue, protect products or grow market share—just not for its own sake. Avoid getting caught up in the natural tendency to mistake activity for value or quantity for quality. 

Following are four things to consider and/or complete before acquiring a tech startup:

1. Take inventory of your target’s technology and IP. Don’t always rely on schedules created by the target. Identify what is covered and, maybe more importantly, what ought to be covered but isn’t. Make sure that the target actually owns the technology and IP they say and/or think they do. Very often, patents and applications are not held by the operating entity but some third party. This is sometimes done for tax purposes and sometimes done to shield the IP from lawsuits (or even from your acquisition). Make sure that the target owns the IP free and unencumbered. Many startups are granting angel investors and venture capitalists security interests to the core technology and IP as an added protection and inducement for investors. 

2. Make sure the target owns the IP you want. Do they have IP that covers the platform you are so interested in buying? Surprisingly, the answer is sometimes that they do not. Many reasons can explain this phenomenon. First, issued patents almost always lag behind the technology for obvious reasons. Yet the reason for a lack of coverage can be potentially more problematic. For instance, the company may not value IP or the underlying technology the way you do. A company could be indifferent and disorganized because the weeklong hackathons take precedence over filing out disclosure forms. Likewise, a company might be rabidly guarding yesterday’s IP while failing to innovate.

3. Copyrights, trademarks and trade secrets are often messier than patents. For example, state law largely governs trade secrets, whereas federal law governs patents. Also, trade secrets require reasonable precautions to keep them secret and therefore enforceable. Key people have key information, and even the rumor of an acquisition can send the most important employees looking for their own exits. Do they even have confidentiality agreements? If so, how are they written, and will they stand up?

4. Who owns the software code, and is it source code or object code? Was it written by an outside vendor or homegrown? Who, if anyone, actually knows how it works? Is it documented well enough for your own engineers to work with it? (Probably not.) How is it archived, or is it even archived? Who owns the customer data—is it the customer, the company or is it not clear? 

At the end of the day, when you have the opportunity to merge or acquire a company whose technology you want, make sure you know what they own, how they own it and whether they can actually give it to you. In today’s technology economy, these inquiries cannot be more critical to the success of your deal.   

Contributing Author

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Gregory Novak

Gregory V. Novak is the Chief Executive Officer and Managing Partner of Novak Druce Connolly Bove + Quigg. Mr. Novak serves as national intellectual...

Additional Contributors: Aaron M. Levine

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