Chasing Down a Software Company's Missing IP Assignments

The situation

Etienne, a specialist physician, and Luc, who owned a group of franchise locations, had been investing together informally for several years before they decided to buy a company outright. The target was a Newmarket-based software business that built scheduling and records tools for specialty medical clinics. It had grown steadily under its founder, Ngozi, into a business worth roughly $65 million by the time the three of them reached an agreement in principle.

Etienne brought clinical credibility to the deal, having used similar systems in his own practice for years. Luc brought operating experience running multiple locations and managing staff. Together they planned to hold the company, keep Ngozi on for a transition period, and expand the product into new specialties. The purchase price sat in the $50 million to $80 million range typical for a mid-market technology acquisition, funded through a mix of the buyers' own capital and a loan secured against the target's cash flow.

Before the deal could close, our team was retained to run due diligence on the target — the process of verifying, before money changes hands, that what the buyer thinks they are purchasing is actually what the seller owns and can legally transfer.

What the diligence found

For a software company, the single most valuable asset is usually the code itself, along with the intellectual property rights attached to it. Buyers are not just purchasing a product; they are purchasing the exclusive legal right to use, modify and sell that product going forward. If the seller does not actually hold clear title to the code, the buyer can end up paying tens of millions of dollars for something a third party could later claim a share of, or block outright.

Our review of the target's intellectual property file turned up two problems in the chain of title — the unbroken sequence of agreements that shows how ownership of a piece of intellectual property passed from the person who created it to the company that now claims to own it.

The first gap involved a contract developer who had written a significant portion of the platform's core scheduling engine several years earlier, before the company had formal processes in place. The agreement on file with that developer was a short services contract that described the work and the payment terms but never included a clause assigning intellectual property rights to the company. Under Canadian copyright law, the default rule is that the person who creates a work owns the copyright in it unless they expressly assign it in writing — being paid to write code does not, on its own, transfer ownership of it. Without that assignment, the developer, not the company, was the technical owner of a meaningful share of the codebase Etienne and Luc were about to pay tens of millions of dollars for.

The second gap was closer to home. An early co-founder had left the company roughly four years earlier, well before it reached its current scale. The separation had been amicable, and the departing co-founder's shares had been properly bought back through a standard shareholder agreement. But shares and intellectual property are separate things. Nothing in the file showed that the co-founder had ever formally assigned their own contributions to the code — written in the company's first eighteen months, before that shareholder agreement existed — to the corporation itself.

Neither gap was the kind of thing that would show up in a casual review of the company's financial statements, because neither one had cost the company any money or shown up as a liability. It was the kind of risk that stays invisible until someone tries to enforce it — a departed developer asking for a share of a $65 million sale, or refusing to license their contribution at all.

What we did

1. Mapped the codebase against its contributors. Working with the target's technical lead, we identified every individual who had contributed meaningfully to the core platform since its founding, then matched each one against a signed intellectual property assignment agreement in the corporate file. This produced a short list of two gaps rather than a vague sense that "something might be missing."
2. Located and re-engaged the former contractor. The contract developer was still working in the industry and was traceable through public professional listings. We prepared a retroactive assignment agreement confirming that all intellectual property in the work delivered under the original services contract belonged to the company, along with a release of any further claims, in exchange for a one-time payment funded by the seller.
3. Negotiated the same fix with the departed co-founder. Because the earlier separation had been amicable and well-documented on the share side, the conversation was more straightforward. The former co-founder signed a similar assignment and release, confirming that any code written during their time with the company belonged to it outright.
4. Rebuilt the representations in the purchase agreement. Once both assignments were signed, we updated the seller's representations and warranties — the seller's formal, legally binding statements about the state of the business, which the buyer relies on in deciding to close — to confirm clear title to all material intellectual property, with named exceptions closed out rather than left open.
5. Added a narrow indemnity as a backstop. Even with both assignments signed, we negotiated a specific indemnity from Ngozi covering any future claim traced to intellectual property created before the assignments were executed, on top of the general warranty coverage. This gave Etienne and Luc a direct remedy if either individual ever tried to revisit the arrangement, without holding up the closing itself.

The outcome

Both assignment agreements were signed roughly six weeks after diligence flagged the gap, comfortably within the window the parties had built into their timeline for closing. The retroactive payments to the former contractor and former co-founder came out of the roughly $65 million purchase price rather than as an addition to it, negotiated as part of the overall deal rather than treated as a surprise cost to either side.

Etienne and Luc closed the acquisition with a clean chain of title to the company's core software, backed by a specific indemnity covering the exact risk that diligence had identified. Ngozi transitioned into an advisory role with the new owners as originally planned, and the deal that had been agreed in principle went ahead on essentially the terms first discussed — the diligence process changed what stood behind the price, not the price itself.

The gap could easily have gone unnoticed. The company had operated for years without either issue causing a problem, because neither the contractor nor the former co-founder had any reason to assert a claim while they had no relationship with a $65 million acquisition. It was the diligence process itself — the discipline of matching every contributor to a signed agreement rather than assuming the corporate file was complete — that turned an invisible risk into a fixable one, months before it could have become an expensive one.

What you can learn from this