Dreaming about selling your tech business one day? Don’t wait for a buyer to come along and uncover problems at the 11th hour.

A successful exit is not just about having a great product and team, strong growth and attractive financials. Buyers will also want confidence that the legal foundations are solid. Issues uncovered during due diligence can cause delays (and stress!), reduce bargaining leverage and, in some cases, even affect value or a buyer's willingness to proceed.

The good news? Most legal issues can be fixed; it's just usually a lot easier (and cheaper) to fix them early, well before a sale is on the cards.

Here are some key areas for founders to focus on.

1. Know your IP, make sure you own it and register where appropriate

For a tech company, IP is often the crown jewel. A buyer will want to understand what the company's key IP is, who owns it, and that the company has all necessary rights to commercialise it.

Start by identifying your key IP. This may include copyright in software, patentable inventions, trade marks/brands, designs or databases.

Then make sure you have a properly documented "chain of title" which demonstrates your company owns it. For all developers and creators of the IP, whether founders, employees or contractors, you want to be able to produce signed agreements which clearly spell out the IP is owned by your company. And if your development team uses AI tools to generate code or other IP, make sure the AI provider's terms give you ownership of and/or unrestricted rights to use the AI "outputs", and keep records of the tools used and the associated terms. We recommend having a clear company policy on which generative AI tools can be used.

You also need to consider how the IP is going to be protected. In some cases, such as patentable inventions and trade marks/brands, this may be through formal registrations, not just in New Zealand but your key international markets. And where your product is a patentable invention, you will want to show your company has "freedom to operate"; the ability to commercialise your product without infringing other patents. Speaking to a patent attorney early on about registrations and freedom to operate is critical.

It's also important not to get caught out incorporating the wrong open source software into your product. Open source software can be used so long it's licensed under appropriate terms. Be particularly wary of any open source software made available under a "strong copyleft” or "viral" licence, which may impose obligations to disclose or license your combined product incorporating the open source software. As with generative AI tools, keep records of any open source software used and the applicable licence terms, and have a clear company policy around acceptable open source use.

2. Be on top of security and privacy compliance

For many technology businesses, data is an important asset. It can also be a source of risk.

Data security is often a key concern. You should have robust security processes and arrangements in place. These should be documented, and if feasible it can help to supplement these with assurances from third parties, such as a relevant security certification (e.g. ISO 27001) or security testing/audit reports.

You should also be able to demonstrate that your collection and processing of personal information complies with the privacy laws that apply to your business. That may mean looking beyond New Zealand's Privacy Act 2020, e.g. if your business has customers in the EU and you collect or process personal data relating to EU residents, GDPR may apply.

The best place to start is with a "data mapping" exercise, where you identify the data you collect, who you collect it from, where you store it, what you use it for, and who you disclose it to. Then make sure you have properly documented privacy policies, notices and processes, which accurately describe how you process information and (if applicable) the appropriate legal grounds for this, and capture any necessary consents from individuals/data subjects. If you engage third parties to process data for you, ensure your contracts contain appropriate privacy and security provisions.

3. Make sure your key commercial contracts are an asset, not a liability

Your key customer, supplier and partner agreements will be scrutinised closely as part of a buyer's due diligence. When it comes to negotiating key agreements, you won't normally have it all your own way, but you should do your best to avoid any "red flag" terms that might discourage a buyer. These could include things such as:

• unfavourable exclusivity obligations
• restraints that restrict the company's ability to operate or expand
• pricing provisions that lock the company into below-market or long-term fixed pricing

There are also terms that you can seek to avoid or include which can make an exit easier, such as (avoiding) change of control provisions or (including) rights to assign the agreement as part of a sale/merger of the business.

The ultimate objective is to ensure your key agreements add to, and don't detract from, your overall business proposition.

4. Maintain a clean cap table

When selling (particularly when selling the shares), the buyer needs to know exactly who owns the company and who is entitled to its shares. The buyer needs to be comfortable it will acquire 100% of the company.

Make sure:

• you have an up-to-date cap table reflecting all outstanding shares, options, convertible notes and SAFEs
• you have an up-to-date share register (this isn't the same thing as the Companies Office website)
• all share issues, buy-backs and transfers have been registered/filed with the Companies Office

5. Make sure you have proper written employment agreements

Your people are often a critical part of the business/transaction.

Make sure you have written employment agreements with all of your employees (including yourselves!). This is legally required, and a good way of protecting the company through appropriate IP, confidentiality and restraint/non-solicitation provisions. Employment laws tend to change frequently, so keep your employment agreements current and compliant, rather than leaving this as a problem for the buyer to fix.

6. Document related party arrangements

Startups move quickly, and understandably documenting related party arrangements is probably not high on the priority list.

However, when it comes time to sell, undocumented arrangements can cast doubt over past transactions or what the buyer will be acquiring. For example, was the emergency funding a founder tipped into the company a loan or consideration for further shares to be issued to the founder?

Before starting a sale process, ensure the terms of these arrangements are documented and have been properly approved by the board and (if necessary) shareholders. This makes it much easier for the buyer and its advisers to understand the past transactions (and their accounting and tax treatment), and how (if it all) the arrangements should be dealt with as part of the transaction.

7. Maintain a data room/document repository

A surprisingly common problem in due diligence is not that documents don't exist; it's that it's difficult or time-consuming to find them.

Key documents, not just legal but also financial, accounting/tax, product and people, should be stored in an organised and secure document repository. They shouldn't be sitting in a founder's inbox, an employee's laptop or scattered across different cloud storage accounts.

A well-organised data room or document repository means that when a buyer asks a question, you can find the answer quickly and provide the underlying document. This matters because speed and organisation during due diligence can itself give the buyer confidence in the business. It also reduces the time and cost involved in responding to what can be hundreds of buyer questions.

Final thoughts

An exit is a huge deal, and the process can be taxing on founders. However, engaging in good habits well before a buyer comes knocking can save a lot of pain, and ensure the price and terms you negotiated upfront in the term sheet withstand the buyer's due diligence.

We can help with this, whether by running a legal health check over what you've already got in place, advising on what to do moving forward, or both.

If you would like more information about getting your startup exit-ready, get in touch with Matt Smith or Sam Wilson.