The craft
Legal & IP checks
The legal checks a small cheque can do without a lawyer — corporate records, IP assignments, employment status and the contracts that decide what happens at exit.
Realistic time Two to four hours
Full legal diligence requires a lawyer and costs more than most angel cheques justify. What an individual investor can do is check the handful of things that go wrong most often, cost nothing to verify, and are close to unfixable once a company has grown.
Four items account for most of the damage: intellectual property that the company does not own, contractors who are employees in substance, equity promised and never documented, and corporate records that do not match what investors were told.
Everything else is either the lead investor's problem or genuinely requires professional advice. Knowing where that line falls is what keeps diligence proportionate.
01
Does the company own its IP
This is the single most important legal check at early stage. A company whose core technology was written by someone who never assigned it does not own its product, and the problem surfaces at the worst possible moment — during an acquisition, when the person concerned has leverage and a lawyer.
The three recurring gaps: contractors and agencies who were never asked to assign, code written by a founder while employed elsewhere, and open source components with licences that impose obligations the company has not considered.
Ask directly whether every person who has contributed code or design has a signed assignment, and ask to see two or three of them. Founders who have this in order produce the documents immediately.
Check
- Signed IP assignments from every founder, employee and contractor.
- Was any core work done while a founder was employed elsewhere?
- Do any founders have restrictive covenants or non-competes outstanding?
- What open source is used, under what licences, and has anyone reviewed them?
- Are trade marks registered in the markets that matter?
- For patents: what is granted rather than filed, and in which jurisdictions?
02
Corporate records
In many jurisdictions a company's filings are public and free to search. UK companies file at Companies House, and articles of association, directors, charges and share capital can all be checked in minutes without asking anyone. Other registries vary in what they publish and are usually worth a look.
What to check: that the share capital matches the cap table you were shown, that the directors are who you were told, that there are no registered charges you were unaware of, and that filings are up to date. A company with overdue filings is not necessarily in trouble but is telling you something about its administration.
The articles are worth reading directly where they are public. They contain the drag-along threshold, the transfer restrictions and the share rights — the terms that will govern your position — and reading them costs nothing.
Check
- Search the public registry and compare filings with what you were told.
- Check share capital against the cap table.
- Check for registered charges or security over company assets.
- Read the articles for drag-along, transfer and share-class provisions.
- Check whether filings are current or overdue.
03
People and employment
The recurring problem is contractors who are employees in substance. Someone working full time, for one client, under direction, for a long period is often an employee regardless of what the contract says, and the exposure — back tax, social contributions, penalties — grows for as long as the arrangement continues.
The second is undocumented equity. Options promised in an offer letter, an adviser told they would get half a percent, a first employee who was verbally assured of something at incorporation. Each is a real obligation, none appears on the cap table, and all surface during a financing or a sale.
Check
- How many people work full time as contractors, and for how long?
- Are employment contracts in place for everyone who is an employee?
- Has any equity been promised in writing but never granted?
- Are there any adviser agreements with equity attached?
- Any current or threatened employment claims?
04
Contracts that matter at exit
Customer and supplier contracts contain provisions that only become relevant when the company is sold, and by then they cannot be changed. The important one is a change-of-control clause allowing a counterparty to terminate on an acquisition — which, in a company with concentrated revenue, can reduce the price or stop a sale.
Also worth checking: exclusivity granted to any customer or partner, most-favoured-nation pricing commitments, and any agreement granting a third party rights over the company's IP.
Check
- Change-of-control provisions in the largest customer contracts.
- Any exclusivity granted to a customer, partner or distributor.
- Most-favoured-nation pricing commitments.
- Any licence granting a third party rights over the company's IP.
- Termination and notice provisions in the largest agreements.
Stop and think
Red flags
- Core code written by a contractor with no signed IP assignment.
- Work created while a founder was employed by someone else.
- Long-term full-time contractors with no employment contracts.
- Equity promised in writing and never granted.
- Public filings that do not match the cap table presented.
- A change-of-control termination right held by the largest customer.
- Registered charges over company assets that were not disclosed.
Take these into the room
Questions to ask the founders
- Does every person who has written code have a signed assignment?
- Was any of this built while you were employed elsewhere?
- How many of your people are contractors, and for how long have they been full time?
- Has any equity been promised that has not been granted?
- Can your largest customer terminate if the company is acquired?
- Are there any charges registered over the company's assets?
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