Meaning
Uncertainty about the ownership of intellectual property or corporate shares can make a startup uninvestable. When title risk exists, it usually means there is a gap in the chain of ownership for the company’s core technology or its stock. This issue is a common reason for funding rounds to fall through during due diligence.
Ownership Gaps
If an early developer worked on the product without a signed assignment agreement, they may still own that part of the code. This situation creates a risk that they could stop the company from using its own product or demand a large payment. This problem must be resolved before the company can move forward.
Corporate Registry
Incomplete records of who owns which shares can also create confusion and legal risks. If the company’s capitalization table does not match its actual share certificates, it is difficult to prove who has the right to vote or receive dividends. This confusion can lead to disputes among shareholders.
Resolution Process
Resolving these issues requires the company’s lawyers to track down all past contributors and shareholders to get signed release and assignment agreements. This cleanup can be expensive and time consuming, but it is necessary to clear the company’s record. This work must be completed before any major transaction can occur, ensuring that the business has a clean and undisputed claim to all of its corporate assets and technology before presenting itself to potential buyers.
