Private equity firms and venture capital investors spend significant time and money on due diligence because they know the biggest risks are often hidden beneath what can look like impressive growth numbers.
Recent guidance on the diligence frameworks used by a leading consultancy firm highlights a simple reality: deals rarely fail because of the pitch deck but because diligence uncovers issues that create uncertainty, risk, or future cost.
For scaling businesses preparing to raise investment, secure acquisition offers or pursue international expansion, understanding these potential deal killers is essential. Many of the biggest risks are not financial. They are IP, legal, ownership and governance issues that could have been identified and resolved months earlier.
In this blog, we’ll look at these issues and explain how, as IP lawyers, we can help you negate these risks before you start speaking to an investor, to maximise your chances of securing the investment you need.
1. The company doesn't actually own its IP
One of the most common reasons investors become nervous is discovering gaps in IP ownership.
Founders often assume that because they paid a contractor, commissioned software development, or worked on an invention before incorporation, the company automatically owns the resulting intellectual property. Unfortunately, this is often not the case, and investors still regularly discover:
- Missing IP assignment agreements
- Contractors retaining ownership rights
- Founders who developed technology before the company existed
- Unclear ownership of software code, algorithms, designs, or brands
- Joint ownership arrangements that restrict commercialisation
This uncertainty can affect core assets, including company logos, key elements of code or databases, or proprietary technology. Often, such assets sit at the heart of the value of the business, and without resolution, a lack of clarity as to ownership can make investment impossible.
The risk can be most stark where business value resides within patentable technology, but where it is not clear who invented, or who is entitled to a patent in, that technology. If ownership is uncertain, the patent portfolio may have significantly less value than expected.
Such difficulties reach far more widely than patents, however, and may touch upon other key technology including software, information in databases, and branding and marketing collateral. Any uncertainty over title to key assets creates legal risk that investors may be unwilling to accept, as Mark Nichols, a senior associate in Potter Clarkson’s litigation and licensing team, explains:
"We've seen promising investment opportunities delayed or derailed because ownership of the underlying IP was not properly documented. Investors need certainty that the company owns its most valuable assets. Without that certainty, legal and commercial risks can outweigh the opportunity."
2. Protection hasn't kept pace with growth
Many scaleups successfully reach £1m, £5m or even £10m in revenue before reviewing whether their IP strategy reflects their commercial ambitions. This can cause a raft of issues including:
- No patent filings for potentially patentable innovations
- Trade marks registered only in domestic markets
- Missing protection in key territories
- Weak brand protection strategies
- Limited freedom to operate (FTO) analysis
Investors are not simply investing in what a company has achieved today. They are investing in what it can achieve tomorrow. If international growth plans depend on technology or brands that lack adequate protection, investors may question whether the company can defend its market position.
Jack Livsey, a senior associate in our Technology, Engineering and Design team, regularly addresses this point when advising scaleups on IP strategy:
"A patent portfolio only has real value if it supports the commercial strategy of the business. The question is not simply whether something is patentable, but whether protection will help the company defend the markets, products and revenue streams that matter most. In some cases, filing a patent will be the right decision. In others, confidential know-how may be more valuable. What matters for investors is seeing that the business has made that choice actively and with a clear understanding of how it supports future growth."
3. Open source and software risks
For technology businesses, software diligence has become increasingly sophisticated, and investors increasingly review:
- Open source usage
- Licence compliance
- Third-party code dependencies
- AI training data sources
- Software ownership chains
A business relying on third-party software or data should be careful to comply with the terms of relevant licences, and to maintain records.
Open source licences in particular can frequently catch businesses out. Certain open source licences require that, where new software is developed incorporating open source software, the new software is licensed on the same terms as the open source software. In other words, incorporating open source software without carefully reviewing the terms of the corresponding licence leaves businesses open to a risk that they have to make their software available for free.
Similarly, companies developing AI solutions face growing scrutiny around training data provenance, ownership of model outputs, and rights associated with datasets. This is a situation Mark Nichols knows well:
"Businesses often underestimate the IP implications of using open source software or training AI systems on third-party data. A failure to comply with open source licence obligations can restrict how technology is commercialised, licensed or transferred, creating significant challenges during investment or acquisition. At the same time, investors and acquirers are increasingly scrutinising AI training data, model development practices, and ownership of outputs. Companies that can demonstrate clear governance and provenance are far better placed to support growth, attract investment, and achieve a successful exit."
These issues may not stop investment entirely, but they can materially reduce valuation or extend diligence timelines.
4. Freedom to operate (FTO) concerns
Securing patents is important, but investors also want confidence that a business can trade without infringing someone else's rights.
A strong patent portfolio does not automatically mean freedom to commercialise, so it’s important to be cognisant of the potential red flags:
- Operating in crowded technology markets
- Competitor patent risks
- Lack of FTO analysis
- Ongoing IP disputes
- Warning letters from competitors
Discovering these issues late in the process can create uncertainty around future revenue projections and growth plans for investors. For Jack Livsey, the key is to treat FTO analysis as an evolving risk management exercise, not a one-off legal check carried out only when investors start asking questions:
“At its core, FTO analysis is about proportionate risk management. In technical innovation, you can rarely eliminate freedom to operate risk altogether, but you can take sensible steps to understand it and reduce it to a level that is appropriate for the stage of the business. For an early-stage startup, that might mean a focused, cost-effective review of the most immediate risks. As the business grows, enters new markets, launches new products or approaches investment or exit, the level of analysis should increase accordingly. The key is to make conscious, evidence-based decisions about risk before they become issues in investor due diligence.”
5. Key value drivers depend on one individual
Many high-growth companies are built around the expertise of one founder or technical leader. However, investors want institutional value, not individual dependency, so they are always vigilant regarding:
- Critical know-how residing with one person
- No documented development processes
- Limited internal knowledge transfer
- Weak succession planning
- Key customer relationships tied to individuals
The more value that exists solely in one person's head, the harder it becomes for investors to assess long-term resilience. Where a business seeking investment is reliant on an individual, it should ensure that that individual is subject to terms of engagement keeping value within the business.
6. The data room reveals legal housekeeping problems
Experienced investors expect corporate records to be organised, complete, and readily available. Missing or incomplete documentation can raise concerns about management capability and governance standards.
Typical examples of this type of housekeeping problem include:
- Missing shareholder agreements
- Incomplete board records
- Undocumented share issuances
- Incorrect cap tables
- Missing employment agreements
- Unexecuted contracts
While these issues may appear administrative, they often create significant delays during transactions and can substantially increase legal costs. Investors frequently interpret poor documentation as evidence that other risks may exist elsewhere within the business.
7. Regulatory and compliance gaps
As businesses scale, compliance requirements increase. The areas attracting particular scrutiny from investors include:
- Data protection compliance
- Cybersecurity measures
- Industry-specific regulations
- Product certification requirements
- ESG reporting obligations
- Compliance with developing AI regulations
A regulatory issue may not be visible in topline growth figures, but it can become a significant liability post-investment. Investors therefore increasingly view compliance preparedness as an indicator of management maturity.
Why do the best investors want potential problems identified early?
Contrary to popular belief, investors do not expect perfect businesses. What concerns them is surprise.
Most investors will work constructively with management teams that identify risks, explain them clearly, and present credible mitigation plans because problems discovered early can often be fixed, whereas problems discovered during exclusivity periods or final diligence reviews are far more likely to derail deals. Again, this is a situation Jack Livsey understands well:
"Investors understand that every business has risks. What matters is whether those risks have been identified, assessed, and are being actively managed. In our experience, issues uncovered early in the process can often be resolved with a clear mitigation plan. By contrast, problems that only emerge during exclusivity or final due diligence can undermine confidence, delay transactions, and in some cases jeopardise a deal altogether."
How RaiseiP helps businesses become investor-ready
At Potter Clarkson, we created RaiseiP specifically to help innovative businesses identify and address the issues that investors are most likely to uncover during due diligence.
RaiseiP combines the expertise of patent attorneys, trade mark attorneys, IP solicitors and commercialisation specialists to provide a comprehensive review of the assets investors care about most.
The RaiseiP process enables businesses to:
- Identify gaps in IP ownership
- Assess patent, trade mark, and design protection strategies
- Evaluate FTO risks
- Review commercial agreements and ownership structures
- Strengthen data room readiness
- Address issues that may impact valuation
- Develop a clear roadmap for investor readiness
Most importantly, RaiseiP helps founders move from assumptions to evidence. This is because when investors begin asking difficult questions, the best answer is not "we think we're covered"; it's being able to demonstrate that you've already found the risks, assessed them, and taken action.
The most successful fundraises are rarely won during the pitch. They are won during diligence. RaiseiP helps ensure that when investors take a closer look, they find confidence rather than concerns.
Jack and Mark are highly experienced in helping businesses get investor-ready and maximise their chances of securing the investment they need. If you’d like to discuss how you can make your business more attractive to investors, please contact us today.
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