Buyers investigate IP ownership chain (ensuring all employee and contractor IP assignments are complete), freedom-to-operate analysis (whether the company's products infringe third-party patents), open source code usage (checking for copyleft licenses that could affect product commercialization), and any pending or threatened IP disputes. Gaps in IP assignment from early contractors or co-founders are among the most common findings that affect deal pricing.
IP diligence is the cornerstone of any technology acquisition. The review covers ownership chain of title for all patents, trademarks, copyrights, and trade secrets, including verification that all founders, employees, and contractors who contributed to the company's technology have executed valid invention assignment agreements. Open source software usage must be audited to identify components subject to copyleft licenses such as GPL that could require disclosure of proprietary source code. For AI companies, Gurpreet Bal advises buyers to diligence the provenance and licensing of training data, the ownership status of model weights and architectures, compute supply agreements and dependencies, and the regulatory status of AI-generated outputs under applicable laws.
Buyers verify that the cap table matches all underlying legal documents — stock purchase agreements, option grants, SAFE agreements, and convertible notes — and look for any undocumented equity commitments, oral agreements, or promised equity that has not been formalized. Outstanding warrants, anti-dilution provisions, and rights of first refusal from investors are also scrutinized because they affect the fully diluted share count and the allocation of proceeds.
Capitalization diligence verifies the target's equity structure, including all outstanding shares, options, warrants, SAFEs, convertible notes, and other equity-linked instruments. The review confirms that all equity issuances were properly authorized by the board and stockholders, that securities law exemptions were properly claimed, that 409A valuations support the exercise prices of outstanding options, and that the company's capitalization table accurately reflects all outstanding instruments. In Gurpreet Bal's experience, capitalization errors are surprisingly common in venture-backed startups, including missing board consents, incorrect share counts, and SAFEs that were never properly recorded on the cap table.
Buyers review employment agreements for change-of-control provisions that trigger automatic vesting or cash payouts, non-compete and non-solicitation agreements to assess their enforceability, and any pending employment disputes. Worker classification issues — whether contractors should have been classified as employees — are particularly important because misclassification liability transfers to the buyer in a stock purchase or merger.
Employment diligence reviews the target's workforce composition, including employee and independent contractor classification, at-will employment status, compliance with wage and hour laws, outstanding employment claims or litigation, key employee agreements including noncompetition and nonsolicitation provisions, and benefit plan compliance. For acquihires where the team is the primary asset, Gurpreet S. Bal advises buyers to conduct individual-level diligence on key employees, including reviewing their existing equity holdings, any acceleration provisions triggered by the transaction, outstanding loans or advances from the company, and any pre-existing IP obligations to former employers.
Buyers examine the target's compliance with GDPR, CCPA, and sector-specific regulations, the history of any data breaches or regulatory investigations, the adequacy of the company's privacy program, and any pending regulatory inquiries. CFIUS clearance obligations are also assessed if any investors or ownership have foreign connections that may require regulatory review of the transaction itself.
Regulatory diligence covers the target's compliance with all applicable regulatory frameworks, including CFIUS implications if the buyer has foreign ownership, export control compliance under the EAR, privacy compliance under CCPA/CPRA, GDPR, and sector-specific regulations, and any industry-specific licensing or permit requirements. For AI companies, regulatory diligence must assess the target's exposure to emerging AI regulation, including the EU AI Act, state-level AI legislation, and any voluntary commitments or industry standards the target has adopted. Gurpreet Bal advises that regulatory diligence findings frequently affect deal structure, pricing, and the scope of representations and warranties in the purchase agreement.
Gurpreet S. Bal is a Partner at Foley and Lardner LLP in Silicon Valley, where he advises startups, founders, and investors on mergers and acquisitions, venture financings, IPOs, and cross-border transactions. He has advised on more than 50 M&A transactions with aggregate deal value exceeding $60 billion across AI, semiconductors, fintech, and emerging technology.