The Outlaw Chronicles: Issue #6
Subject line: Due diligence. Day 3. The round is dead.
Preview text: $2.4M Series A on the table. The investor's lawyer asked one question. Nobody had an answer.
Send date: Monday 10 AM CET (weekly cadence)
Status: DRAFT
Mission Briefing
Ori had been writing code for the company for three years. He was, by any measure, the reason the product worked. On day three of Series A due diligence, the investor's lawyer asked whether Ori had signed an IP assignment agreement. He had not. The $2.4M round died in a conference call that lasted eleven minutes. This issue is about why that question exists and how to answer it before it is asked.
Venture Odyssey
Departure: The engineer who built everything
Ori is from the Orion Nebula, which is a stellar nursery, a place where new stars are constantly being born out of gas and dust and improbable gravitational arrangements. People from the Orion Nebula tend to be generative in the specific way of things that cannot stop making other things. Ori had three floating code windows orbiting him at all times. Even at dinner. Even asleep, reportedly. He was the kind of technical mind that founders spend years trying to find and then spend years more trying to retain.
Lyri had found him through a mutual contact, at a conference where she was speaking and he was in the audience looking bored until she said something about distributed state management that made him sit up. She bought him a coffee. He sketched an architecture on a napkin. She offered him a co-founder slot and 30% of the company. He said he needed to think about it. He called her back the next morning.
He never signed a co-founder agreement. There was an email chain where she said "30%" and he said "sounds right" and that was treated, by mutual unspoken agreement, as the founding moment. He had other things to do. She had other things to do. The formalities would happen eventually. Eventually kept moving.
He started writing code. The code became a product. The product got users. The users became revenue. The revenue became a story worth telling to investors.
Lyri ran the fundraising. She was good at it. Emerald-green skin, Lyra constellation origin, a founder who moved fast and signed fast and got things done with the specific momentum of someone who had learned that hesitation was more expensive than mistakes. She had the deck. She had the metrics. She had a lead investor who wanted to close before quarter end.
Perry was from Nova Centauri. He was the kind of investor whose first move was always a warm introduction rather than a term sheet, which was why founders trusted him before he wrote a single number on a page. He had been following the company for seven months. He led due diligence with a small, methodical team. He was the kind of investor who did not want surprises. He had been burned by surprises twice and had developed a philosophical position on them.
The due diligence started on a Monday.
Layover
: The question on day three
Day one was financials. Lyri had those. Clean books, sensible burn, a CFO who had been around long enough to know what investors looked for in a data room.
Day two was contracts. Customer agreements, vendor contracts, employment paperwork for the twelve people on the team. Lyri sent the folder. The investor's legal team reviewed overnight.
Day three was IP.
The IP review is, in most Series A due diligence processes, the moment that separates the rounds that close from the rounds that do not. Not because founders are careless. Because IP has a specific legal property that everything else does not: it does not belong to the company unless someone put it there on purpose.
The investor's lawyer, a careful woman who had done forty of these reviews, sent a request at 9 AM on Wednesday. The request listed several items. Item three was: "Signed IP assignment agreements for all founders and key technical employees confirming that all intellectual property created in connection with the company has been assigned to the company entity."
Lyri read the request in the back of a cab. She forwarded it to the company's lawyer. She texted Ori. She said: "Did you sign an IP assignment at some point early on?"
Ori responded after forty minutes. "I don't think so. What does that mean?"
The company's lawyer called Lyri at 11 AM.
"He has never signed an IP assignment," the lawyer said.
"Can we prepare one now?"
"We can prepare one. The problem is that it covers IP created from this point forward. The IP he created before signing, which is to say the core product, the architecture, three years of commits, is not covered by a document signed today. It was created by him as an individual and was never formally transferred to the company."
Lyri was quiet for a moment. Then she said: "Who does it belong to?"
The pause before the answer was not long. But it was the kind of pause that carries information on its own. "It depends. In most jurisdictions, IP created by an independent contractor or a co-founder who has not signed an assignment belongs to the creator. It does not automatically transfer to the company entity just because the person worked for the company. The company may have an implied licence in some circumstances. Whether that implied licence would survive a legal challenge is a different question."
The call with Perry happened at 3 PM.
He was not unkind about it. Perry was never unkind. But he was clear.
"We cannot close a round where the core product IP is not demonstrably owned by the entity we are investing in," he said. "I want to find a path here. My lawyers are telling me the path requires a formal IP transfer agreement, a legal opinion on its enforceability given the retrospective nature of the transfer, and potentially a clean-up period of sixty to ninety days while we confirm no third-party IP has been incorporated without licence. That is not a Tuesday close."
The round did not die that afternoon. It died six weeks later, when the clean-up process surfaced a second issue: Ori had used an open-source library under a licence that required any commercial product incorporating it to release its own source code. The product had not done that. Fixing it meant a rewrite of one module and a legal letter to the licence holder. The investor's timeline could not absorb it.
$2.4 million. Eleven-minute call. Three years of building.
I was not in that room. But I have been in rooms like it. The texture of the silence after that kind of call is something you do not forget. It is the silence of a very large thing that was going to happen not happening, and everyone on the line understanding it simultaneously.
The part that is hardest to hold is this: Ori had done nothing wrong. He had built something real. He had given three years to a company he believed in. He had simply never been asked to sign a piece of paper that said the thing he built belonged to the company he built it for. Nobody had explained that the paper mattered. Nobody had explained that the company and the person were, in the eyes of IP law, separate entities with separate rights, and that the transfer between them required a deliberate act, not a shared understanding.
Here is what IP assignment actually is. When an employee or contractor creates intellectual property, the default rule in most jurisdictions is that the creator owns it. Not the company. The creator. Employment agreements sometimes include an assignment clause that changes this for work done within the scope of employment. But founders who join before the formal employment structure exists, contractors who work on a project basis, and co-founders who start building before the paperwork is in order are frequently outside the scope of those clauses. The IP assignment agreement is the document that says: anything I have created or will create in connection with this company belongs to this company. Without it, you have a company that uses IP it does not own.
Arrival
: What the data room is actually checking
When a Series A investor runs IP due diligence, they are asking one question underneath all the specific document requests: does this company own what it is selling? The product. The code. The algorithms. The brand. If the answer is yes with documentation, you close. If the answer is yes but informally, you are in a negotiation. If the answer is no, the round pauses until it becomes yes.
The fix is a single document, executed early. A Confidential Information and Invention Assignment Agreement, sometimes called a CIIA or a PIIA depending on which law firm drafted your template. Every founder signs one. Every employee signs one at hire. Every contractor signs one before the first commit. The document says: I assign to the company all IP I create in connection with this company, I confirm I have no prior inventions that conflict, and I will keep company information confidential. It takes ten minutes to sign and roughly three years of consequence if it is missing.
The analogy that comes to mind is a house built by a contractor who never transferred title to the land. You can live in the house. You can renovate it. You can invite people in and show them what you built. But the day someone asks to see the deed, the conversation gets complicated very quickly. The house is real. The ownership is the question.
Sign the assignment. Sign it early. Make it the first document every new team member signs, before they touch a line of code or write a word of the product spec. The data room will ask for it. The question is whether you want to be looking for it on day three, or sending the folder before day one.
The Blueprint
Pull out every founder's onboarding paperwork from the company's founding date. For each co-founder, confirm whether they signed a CIIA or PIIA before they began creating anything for the company. If the answer is no or you are not sure, put a flag next to their name. Done looks like: a list with one row per founder, a yes or no next to each, and a date if yes.
Run the same check for your first ten employees and any contractor who touched core product code. The IP assignment is most critical for the people who built the most. If you had a freelance developer build your MVP before you had a legal structure in place, their work may not belong to you. Done looks like: every early contributor has either a signed CIIA on file or a note explaining what remediation has been done.
Commission retroactive IP assignments for any gap you found in steps 1 and 2, and lock in a signed CIIA on the day-one checklist for every new hire. Retroactive assignments are imperfect but better than nothing. Going forward: nobody touches a line of code without signing the paper.
The Question
When you hired your first engineer or brought on a contractor to build something for your company, did you have them sign an IP assignment before they started? Not during onboarding, after they had already committed something. Before. If you did, I want to know how you built that habit. If you did not, I want to know when you found out it mattered. Reply here. The answer is usually a specific moment, and those moments are worth comparing.
Writing this from Barcelona, where I am reviewing a data room for a founder who asked me to check it before her investors do, which is exactly the right order of operations. Next issue: a term sheet that looked completely standard until you found the clause buried in Schedule B, and what that clause did to a founder's ownership after a down round.
Don't let the paperwork be the thing that stops you. Sign it early and forget about it.
Pepe
The Outlaw Chronicles is for education only. Nothing here is legal advice. For the real thing, you know where to find me.