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Author: Carlos Heredia, Attorney
TLDR: In tech and biotech M&A, legal due diligence is often where deals are won, lost or repriced. Buyers use it to validate value and uncover risks, and founders should use it to build trust, preserve deal momentum and protect valuation. Top diligence focus areas that impact deal price include IP ownership and assignments, contract transferability, data privacy and regulatory compliance, corporate housekeeping and cap table integrity, employment and 280G Risks and financial readiness.
Founders can strengthen their position by running a legal due diligence audit 3–6 months before buyer talks and cleaning up IP, contracts, equity records and privacy policies to stay deal-ready.
Bottom line: A proactive legal due diligence strategy helps tech and biotech startups maintain leverage, avoid surprises, and maximize exit value when selling their company.
For many tech and biotech startups that are getting sold, due diligence is where M&A deals are often won, lost or repriced.
Buyers use due diligence to test value and identify risks. Founders should use it to build trust, keep deal momentum and protect price.
Legal due diligence often involves large data rooms and waves of document requests, issues and questions, especially as the buyer’s business, financial and legal advisors take a deep dive into your startup’s operations and records.
It is important to remember that a significant portion of the due diligence data and information (including the matters with extra business and legal risks) will be documented in the Disclosure Schedule (or Schedule of Exceptions) that is attached to and forms part of the signed deal agreement. Not surprisingly, the due diligence process can be a critical part of the deal process and can have significant financial and legal consequences before and after the deal is closed.
Below is a practical guide based on what we see every week at CCG – what buyers ask for, the landmines that derail deals and the quick (and sometimes not-so-quick) fixes that help keep the deal advancing to closing.
What Buyers Care About (And Why It Moves Deal Price)
1. IP Ownership, Clean Chain of Title
Why It Matters: Buyers are paying for clean, defensible technology.
Common Issues: Missing invention assignments for early contractors and employees; university/incubator IP rights that get in the way of future growth; problematic or undocumented open-source use.
Price Impact: Specific indemnities or bigger escrows will be used to cover IP risks, or a hard no on the deal.
2. Contract Transferability and Revenue Durability
Why It Matters: Will current or growing revenues survive a change of control?
Common Misses: Hidden change-of-control provisions in enterprise MSAs; key customers with “assignment only with consent” provisions; reseller/OEM exclusivity that blocks new verticals; payment or contract termination rights upon change of control.
Price Impact: Consents become deal hurdles; push deal funds from initial closing to earnout; more risk with reps & warranties (e.g., broader scope, extended survival periods, higher caps).
3. Regulatory and Data Privacy (SaaS, health tech, diagnostics, AI/ML)
Why It Matters: Fines and forced remediation reduce post-close value.
Common Misses: No data-map or DPA library; unclear sub-processor chain; CLIA/FDA gaps in diagnostics; export-control blind spots (encryption/AI).
Price Impact: Special indemnities, carve-outs in rep & warranty insurance and/or delayed closings.
4. Corporate Housekeeping & Cap Table Integrity
Why It Matters: Clean cap table = clear ownership and predictable closing mechanics.
Common Misses: Undocumented SAFEs, convertible promissory notes and loans; MFN traps and unexpected terms and investor rights; option grants without board approval or option paperwork; 83(b) elections missing or not filed; 409A valuation lapses.
Price Impact: Price reductions, expanded escrow amounts and/or delayed closings.
5. Employment & Equity Incentives
Why It Matters: Retention of key employees and 280G tax exposure.
Common Misses: Double-trigger acceleration hidden in offer letters or stock option agreements; non-competes unenforceable in CA and elsewhere; missing PIIA agreements (invention and IP assignment not in place).
Price Impact: Tax gross-up demands to cover 280G tax exposure (reduces allocable deal funds), more allocation of deal funds to retention pools, buyer-mandated policy fixes to limit exposure or document execution (even with former consultants and employees) before deal signing.
6. Financial Review
Why It Matters: Revenue quality and working capital.
Common Misses: SaaS revenue recognition inconsistent with MSAs; deferred revenue treatment not aligned; sales tax compliance.
Price Impact: Upward pressure on working capital to be delivered at closing, true-ups and purchase price adjustments.
Some Fast Fixes Before You Sell Your Startup
- Assignment Inventory: Run an IP assignment gap check on every founder/employee/contractor. If anything’s missing, fix it with confirmatory assignments now, not during the buyer’s IP deep dive.
- Consent Map: Tag contracts as “No Consent,” “Consent,” or “Notice.” Draft a consent playbook (who asks, when, and what to say). Avoid tipping off the market too early about your deal.
- Privacy/Data posture: Build a one-page data map (type of data, where stored, who has access, sub-processors), keep DPA templates in the data room and be ready to show evidence of access controls and incident response.
- Equity and 280G Grid: Prepare a clean cap table, option roll-forward and an acceleration/280G matrix. Decide early if you will seek a stockholder vote to avoid 280G excise tax issues.
- Cloud & Code Access Continuity: Document how source code, repositories, cloud accounts and secrets will transfer. Buyers do not like “lost keys” at and after closing.
Due Diligence Red Flags that Kill Deals (or Invite Price Reductions)
- A university or corporate employer has lingering rights in founder IP.
- Unfixable change-of-control terms in agreements with the top three customers.
- Government funding with march-in rights or export-control issues involving restricted jurisdictions.
- Unlicensed clinical/diagnostic activity (CLIA/FDA/LDT) presented as “pilot.”
- SAFE chaos: multiple MFNs with varying terms and one sweetheart low-cap SAFE late in the round.
- Security incident not disclosed (even if contained) that later surfaces in the buyer’s cyber scan.
- Equity promises or stock repurchases were not finalized and now cloud the cap table.
- Do-it-yourself company agreements that resurface during due diligence often promise or imply off-market IP rights or rich economics, giving third parties 11th-hour leverage to hold the deal hostage until their demands are met.
If you see one of these, don’t bury it. Work with your deal counsel to package the issue with a remediation plan and, if needed, a specific indemnity. Surprises are worse than bad facts.
Some Negotiation Levers When Legal Due Diligence Gets Messy
- Fix or Adjust Price: Offer a fast remediation path. If the buyer still presses on the issue, trade a targeted special indemnity for preserving the total price.
- Escrow Architecture: Consider targeted special escrows over bigger general escrows; cap the term and scope tightly.
- RWI Strategy: If representation & warranty insurance is in play, use it to narrow general indemnities, but expect exclusions for known issues – try to negotiate those down with documented remediation.
- Earnouts: If the buyer insists on an earnout, try to tie metrics to things you can control (bookings, shipped milestones).
Final Thoughts:
Thinking about a sale, or just want to be ready when a buyer comes knocking? As experienced M&A counsel, we help tech and biotech founders package value, surface risks and maintain leverage through diligence and the rest of the M&A process.
Let’s talk. We’ll tailor a readiness checklist for your company’s specific stack, contracts, and regulatory footprint.
This post is general information, not legal advice. If you’re evaluating a transaction, we’re happy to discuss your deal and next steps for a practical plan.
Clients Also Ask Us:
1. How early should we prepare for diligence?
At least 3 to 6 months before serious buyer talks. Administrative neglect and complicated legal issues need time to fix.
2. What if we find a problem mid-process?
Package it and lead with the fix: describe scope, remedy, timeline and monitoring. Offer a narrow special indemnity if needed.
3. Will RWI solve everything?
No. RWI will not cover known issues or forward-looking covenants. It smooths the edges, but it doesn’t erase risk.
4. Are earnouts bad?
They’re tools. If you accept one, define the metrics precisely and take steps to mitigate future misunderstandings and disputes. Build as much control over the process (if possible), so that you can enhance your ability to achieve the earnout payment(s). Add reporting rights, and include a dispute path with timelines.
