Last updated on August 11th, 2026 at 08:46 am
TL;DR: When an investor or acquirer’s legal team runs due diligence, they aren’t just scanning for red flags, they are pricing risk into every clause that creates uncertainty, liability, or operational restriction. Five specific clause types account for a disproportionate share of the valuation haircuts, deal delays, and collapsed term sheets founders encounter: broken assignability, unchecked change of control rights, gaps in IP assignment, uncapped liability, and restrictive covenants that quietly bind the business years after they were signed. This guide covers each one, why it destroys value specifically, and a practical audit checklist to find and fix these gaps before an investor’s legal team does.
Quick overview: This page goes deep on the specific clauses, not the full list of documents, investors scrutinise during diligence. For the fuller checklist of every agreement category investors actually review before funding a round, our companion guide on startup agreements that investors actually read before funding you covers that ground. This page is narrower and more clause-specific: five particular provisions that, on their own, are disproportionately responsible for valuation reductions, escrow holdbacks, and deals that quietly die in diligence.
Why contract due diligence can make or break your deal
When an investor or acquirer initiates due diligence, their legal team systematically reviews every material contract the company holds: customer agreements, vendor contracts, employment letters, IP assignments, licensing deals, and founder agreements among them. They are not simply looking for red flags; they are pricing risk. Every clause that introduces genuine uncertainty, liability, or operational restriction gets translated directly into a valuation haircut or a deal condition, sometimes both. Treating this review as a fundraising survival skill, not an afterthought, is what separates a clean close from a painful renegotiation.
Clause 1: The missing or broken assignability clause
What it is. An assignability clause governs whether a contract can be transferred to another party, for example to an acquirer who purchases your company. Most founders never think about this when signing a deal; acquirers think about nothing else.
Why it destroys value. When a company is acquired, its contracts typically need to be assigned to the acquiring entity. If your key customer contracts, subscriptions, supplier agreements, or licensing deals contain language requiring prior written consent to assign, you have a real problem: your highest-revenue contracts could effectively walk out the door post-close if a counterparty refuses consent, or uses that refusal to force a renegotiation of pricing entirely. Acquirers discount or exclude contracted revenue that cannot be reliably transferred, and in SaaS and B2B businesses specifically, this can reduce deal value by a meaningful multiple of the affected contract’s annual recurring revenue.
What to do. Audit all material contracts for non-assignment language before entering any funding or M&A process. Where possible, negotiate assignment rights upfront, ideally with a carve-out permitting assignment in connection with a merger, acquisition, or change of control. The language worth seeking specifically permits assignment “without consent in connection with a merger, acquisition, or sale of all or substantially all of the assignor’s assets.”
Clause 2: The unchecked change of control clause
What it is. A change of control clause activates specific rights or obligations when ownership of a company shifts, typically triggered when more than 50% of shares transfer to a new owner, exactly what happens in most acquisitions.
Why it destroys value. These clauses are often buried in agreements founders least expect them: enterprise customer contracts, key vendor agreements, technology licences, and even senior employment contracts. When triggered, they can let a counterparty terminate immediately without penalty, demand accelerated payment of outstanding balances, renegotiate pricing entirely, or withhold consent to the deal itself. Discovering a cluster of change of control rights across your top customer accounts during diligence is a scenario that can restructure an entire deal, or end it. Many founders sign enterprise contracts without flagging this clause because acquisition feels hypothetical at the time; a twelve-person startup closing its first enterprise deal rarely thinks about what happens to that contract on a future exit, and by the time it matters, it’s too late to renegotiate.
What to do. Review every enterprise and licensing agreement specifically for the phrase “change of control.” Where a counterparty holds a genuine right, assess realistically whether they’d actually exercise it and factor that into deal negotiations. In future contracts, push to remove the clause entirely, or limit it to situations where the acquirer is a direct competitor of the counterparty specifically.
Clause 3: Vague or absent IP assignment in founder and contractor agreements
What it is. An IP assignment clause transfers ownership of intellectual property, code, designs, processes, content, inventions, from the creator to the company. Without it, the company may not actually own what it believes it owns.
Why it destroys value. This is one of the most consistently damaging findings in startup due diligence, and it plays out in a few common patterns. Two co-founders build the product together; one leaves, and the IP assignment in their founder agreement was absent, ambiguous, or never signed, leaving the departing co-founder with a technical claim to core technology. Early development gets outsourced to freelancers or an offshore agency without a valid IP assignment, leaving the freelancer holding copyright in code the company has been treating as its own. A developer previously employed elsewhere contributes code that arguably overlaps with a prior employer’s IP, without proper representations and warranties addressing the risk. In every version, a due diligence team flags this as a clean title problem: you cannot cleanly transfer what you don’t actually, legally own. Our guide on what investors specifically check during IP due diligence covers exactly how this review plays out.
What to do. Ensure every co-founder, employee, contractor, and agency has signed a clear IP assignment agreement, ideally before any work begins, not after. Run an internal IP audit to identify gaps and obtain retroactive assignments where they still exist, before entering any deal process. Pair IP assignment with work-for-hire language and, where applicable under local law, a moral rights waiver. This is arguably the single most consequential item on this entire list.
Clause 4: Uncapped liability and indemnification
What it is. An indemnification clause requires one party to cover the other’s legal costs and damages in defined situations. A liability clause caps the maximum financial exposure a party can face under the contract, or, if absent entirely, leaves that exposure genuinely unlimited.
Why it destroys value. Early-stage startups frequently accept uncapped liability or broad indemnification with larger enterprise clients, because the deal feels too important to risk losing and the exposure feels theoretical at the time. During diligence, an acquirer’s counsel aggregates your total potential liability across every active contract; five enterprise agreements with uncapped indemnities tied to data breaches, IP infringement, or service failures can add up to a theoretical maximum liability exceeding the entire deal value. This forces one of three outcomes: a real price reduction, a significant escrow holdback, commonly 12 to 24 months of deal proceeds locked up against potential claims, or the deal simply falling apart. Indemnities tied specifically to IP non-infringement warranties are especially dangerous where your IP chain of title already has the gaps described in Clause 3 above.
What to do. Negotiate a mutual liability cap in every contract, typically set at the value of fees paid in the prior 12 months. Carve out uncapped exposure only for genuinely insurable risks, data breaches, or death and personal injury, and confirm adequate insurance actually covers them. Quantify your theoretical maximum exposure across all active contracts before entering any diligence process, not during it.
Clause 5: Exclusivity and non-compete clauses that bind the business
What it is. Exclusivity clauses prevent a company from working with a specific customer or partner’s competitors. Non-compete clauses prevent the company itself from entering certain markets or geographies for a defined period.
Why it destroys value. What founders sign as a short-term commercial accommodation frequently becomes a permanent structural constraint by the time a deal is on the table. Consider a startup that signs a five-year regional exclusivity agreement with its first major distribution partner, at a moment when that partner accounts for 40% of revenue. Two years later that figure has fallen to 12%, but the restriction still runs for three more years, and an acquirer now sees a company that cannot freely expand in a key market without either waiting out the restriction or negotiating an expensive exit from it. The same logic applies to non-compete covenants signed by key founders as part of an earlier investment round or partnership, which can limit an acquirer’s own post-close strategy and directly reduce what they’re willing to pay.
What to do. Before signing any exclusivity or non-compete covenant, stress-test it against your five-year growth plan, not just your current situation. Time-limit exclusivity arrangements, ideally to 12 months with renewal only on mutual agreement and defined performance thresholds. Run a forward-looking review of every restrictive covenant as part of pre-deal preparation, and proactively seek amendments where a restriction has become commercially unreasonable.
The pre-deal contract audit: a practical checklist
Assignment and change of control. Do all material contracts permit assignment on acquisition? Which contracts contain change of control termination or renegotiation rights? Have you mapped counterparty risk for each one?
Intellectual property. Do all co-founders, employees, and contractors have signed IP assignment agreements? Is there ambiguity about ownership of any core product component? Have you obtained retroactive assignments wherever gaps exist?
Liability exposure. Are liability caps in place across all enterprise contracts? Have you quantified your maximum theoretical indemnification exposure? Is your liability insurance actually adequate to cover the key exposures you’ve identified?
Restrictive covenants. Which contracts contain exclusivity, non-compete, or non-solicit provisions? Do any materially restrict an acquirer’s likely post-close strategy? Are any time-limited provisions about to expire, or problematically long?
General contract health. Are all material contracts properly executed by authorised signatories? Are any unsigned, undated, or missing key schedules? Are related-party contracts documented at arm’s length? Our complete guide to what should be included in every business contract and our guide to the most common contract mistakes that cost businesses money cover the underlying drafting discipline that prevents most of these gaps in the first place.
Fix it before the room changes
Every clause on this list is fixable while you control the timeline, and expensive or impossible to fix gracefully once a deal is already in the room. If your workforce includes fixed-term or contractor arrangements, our guide on employment contracts in India and our Master Service Agreement guide cover the underlying agreements these five clause types typically live inside. If a co-founder departure is part of what’s exposing an IP or equity gap specifically, our guide on what happens to equity when a co-founder leaves and our founders’ agreement guides cover that directly.
Frequently asked questions
What is the single most damaging clause gap found in startup due diligence?
Missing or ambiguous IP assignment from founders, employees, and contractors is consistently the most damaging finding, because it creates a clean title problem: the company cannot demonstrate it actually owns the technology or product it is purporting to sell or raise capital against. This gap is also one of the cheapest to prevent, a signed IP assignment agreement before work begins closes it entirely, but one of the most expensive and slowest to fix retroactively once a deal is already underway.
Why does a change of control clause matter if my company isn’t being acquired right now?
Because it sits dormant and invisible until the moment it matters most, an acquisition, when it can suddenly let a customer or vendor terminate, renegotiate pricing, or withhold consent to the deal proceeding. Founders who sign enterprise contracts early rarely think about a future exit, but by the time an acquisition is real, the contract terms are already fixed and difficult to renegotiate under pressure.
How much can uncapped liability actually affect a company’s valuation?
Potentially by the full value of the deal itself. Acquirers aggregate a company’s theoretical maximum liability exposure across every active contract, and several enterprise agreements with uncapped indemnities tied to data breaches or IP infringement can collectively exceed the deal’s total value, forcing a price reduction, a significant escrow holdback, or the deal falling apart entirely.
Should I run this audit only before fundraising, or on an ongoing basis?
Ideally ongoing, not just when a deal is imminent. Reviewing new contracts against this checklist as you sign them, rather than only auditing retroactively before diligence, prevents most of these gaps from accumulating in the first place, and it means a due diligence request never catches you needing months to remediate what could have been addressed at signing.
Can a startup fix a restrictive exclusivity clause after signing it?
Sometimes, through renegotiation, but it is far harder and more expensive than avoiding the problem at signing. Approaching the counterparty proactively, before a deal is on the table and gives the other side obvious negotiating power over you, generally produces a better outcome than trying to renegotiate under the time pressure of an active fundraise or acquisition.
Authored and reviewed by Prakhar Rai, Advocate, founder of My Legal Pal. Prakhar is enrolled with the Bar Council of India and has over ten years of experience advising startups on contract due diligence, M&A preparation, and valuation-protective drafting across India and cross-border. He is an alumnus of the National Law School of India University, Bangalore, where he completed his Master of Business Laws, and of La Martiniere. Connect on LinkedIn.
This article is general information, not legal advice. The specific impact of any clause on a deal’s valuation depends on your contracts, industry, and the specific transaction. For advice on your own contract audit, speak to a qualified lawyer.
Don’t let a due diligence review be the first time you find these gaps. Our contract review and revision service audits your existing agreements against exactly this checklist, and our contract drafting service builds new contracts that avoid these traps from the outset. Speak to our contract lawyers in India or the USA.
