Many companies, particularly those in the tech sector, are built with their eventual sale in mind. And on the way, those same companies often need to raise capital from professional investors. In both of these situations, the necessary transaction documents will include Representations and Warranties.
These factual statements about the business are given from the company, and sometimes even from its founders and principal shareholders, to provide a snapshot of the business at the time of closing. Reps and warranties, as they are commonly called, touch upon every aspect of the business including ownership and/or proper licensing of all intellectual property (IP) and the absence of breaches of patents, copyrights, etc. owned by others.
IP reps and warranties can be particularly difficult
IP reps and warranties can be particularly difficult because of their highly technical and legal nature. They may cause you to disclose information about your business that could make a potential investor or purchaser nervous (e.g. you did not obtain proper assignments, waivers, etc. from all consultants who helped create your IP). They may also cause liability to the investor or purchaser if you fail to disclose something that is required – sometimes even if you were not aware of the error (e.g. that your product breaches a 3rd party patent).
Over the years, we have seen pre- and post-closing problems with IP reps and warranties that have resulted in delayed closings, purchase price hold backs (until the problem is remedied or the risk period has cleared), purchase price reductions, and even litigation for damages long after closing.
As the owner of a tech business, it’s important to be aware of potential problems with your ability to give reps and warranties about your intellectual property before they become an 11th hour ordeal. An even better practice is to manage your business with the awareness that you may one day need to rep and warrant the integrity of your IP.
While not exhaustive, here’s a quick best practices list that every tech company should follow to reduce the risk of trouble with IP reps and warranties.
Reduce your risk of trouble with IP reps and warranties
1) Maintain a complete list of all open source code incorporated into your product and keep copies of all agreements. Operate within the scope of your licences to ensure your product is not tainted.
2) Use appropriate IP and services agreements with all developers, employees and contractors and retain all copies. These signed agreements should state that you are the owner of all IP, that they waive all moral rights in their work, and that they won’t incorporate 3rd party code, content, etc. into your products.
3) If you protect your IP as a ‘trade secret’ rather than through patent(s), ensure everyone who is provided access to your IP signs a non-disclosure agreement (NDA) and/or services agreement with a confidentiality clause. Retain all copies. A failure to do so could result in your IP entering the public domain.
4) If your product incorporates technology licensed from a 3rd party, make sure you have the right to transfer the IP and the license without consent.
5) If you license your technology to customers, make sure your license agreements allow you to transfer the license without notice or consent.
6) Don’t allow a backlog of bug fixes and programming errors to build up. No product is perfect at all times, but most reps and warranties require you to disclose material bugs and programming errors. If the list is too long, the purchaser or investor may doubt your product or your competency. Fix problems as they arise.
7) If your product is a component of a 3rd party platform, stay ahead of platform upgrades, audits, etc. to ensure you stay in compliance. Once again, don’t let your ‘to do’ list get too long.
8) If you collect and retain personal information from your customers, make sure you have a written privacy policy that includes the right to disclose and transfer the information.