Key points
- Due diligence on a deeptech start-up covers five areas: the intellectual property chain of title, freedom to operate, the cap table, regulatory compliance and actual technological maturity.
- The investor checks that the company actually owns the technology: assignment of inventions by the founders, assignment of code by the developers and the status of licences transferred from a public laboratory.
- Freedom to operate analysis looks at prior patents that could prevent commercialisation, because holding a patent does not guarantee freedom to exploit.
- Review of the fully diluted cap table covers shares, BSPCE, BSA, AGA, convertibles, the shareholders’ agreement and founder vesting, to anticipate final dilution.
- Regulatory compliance covers the GDPR (record of processing, DPA, impact assessments) and sector-specific regulations depending on the field: health, finance, energy or cybersecurity.
- A flaw in any one of these five blocks can derail the fundraising or lead to conditions precedent.
Due diligence on a deeptech start-up covers five areas: the intellectual property chain of title (who owns what), freedom to operate, the cap table and outstanding instruments, regulatory compliance (GDPR, sector-specific, any dual-use issues), and actual technological maturity (TRL, Technology Readiness Level). Any serious deeptech investor examines these five blocks before a firm term sheet. A flaw in any one of them derails the fundraising or leads to conditions precedent.
Table of Contents
ToggleArea 1: the intellectual property chain of title
The investor wants to be sure that the company actually owns the technology it exploits. The review covers:
- Assignment of inventions by the founders: formal, dated deeds of assignment; for patents and patent applications, the transfer must be in writing, failing which it is void (Article L. 613-8 of the French Intellectual Property Code (CPI) (in French)).
- Ownership of source code and inventions: employees (economic rights in software vest in the employer, Article L. 113-9 of the CPI; employee inventions made in the course of their duties, Article L. 611-7 of the CPI), external contractors (express contractual assignment), interns (specific assignment required).
- Status of licences and patents transferred from a public laboratory: agreement with the SATT (technology transfer acceleration company) or the institution, royalty terms, reversion clauses.
- Third-party components: open source licences used (compatibility with commercial exploitation, viral effect of the GPL, MIT/Apache attributions), libraries and SDKs under paid licences.
- Trade marks, domain names, derivative rights: held in the company’s name, not the founder’s.
The slightest defect in the chain (for example a freelancer who never assigned their rights in a critical module) can block the investment.
Area 2: freedom to operate (FTO)
Freedom to operate is the analysis of prior patents that could prevent the product from being commercialised. Holding a patent on your own invention does not guarantee freedom to operate: a third party may hold an earlier patent covering an upstream element your product needs.
The investor examines:
- Prior art search by a specialised firm in international patent databases (Espacenet, USPTO, JPO).
- Mapping of competitors’ patents: owners, priority dates, expiry dates, jurisdictions covered.
- Litigation risks: presence of known patent trolls, competitors’ litigation history.
- Design-around strategy: technical alternatives available, possibility of cross-licensing.
The cost of an FTO analysis depends on its scope. Deeptech investors frequently ask for one.
Area 3: the cap table and dilutive instruments
The investor wants to understand the capital structure and anticipate final dilution. Review of:
- Fully diluted cap table: shares, BSPCE (French start-up share warrants), BSA (share warrants), AGA (free shares), convertibles, under every exercise scenario.
- Existing shareholders’ agreement: pre-emption, drag-along, tag-along, anti-dilution and ratchet clauses.
- BSA Air and convertible bonds: conversion terms, impact at the next round.
- Commitments made to earlier investors: liquidation preference clauses, ratchet, board seats.
- Founder vesting: whether there is reverse vesting (the company can recover the founder’s shares if they leave), duration, cliff.
- Planned option pool: a reserve for future employees, sized for the hiring plan.
Area 4: regulatory compliance
GDPR and personal data
On the basis of Regulation (EU) 2016/679 (GDPR) and the French Data Protection Act (loi Informatique et Libertés) (in French):
- An up-to-date record of processing activities.
- An accessible and compliant privacy policy.
- Legal bases for processing identified for each purpose.
- Data processing agreements (DPA) with service providers (cloud, analytics, payroll).
- Data protection impact assessments (AIPD/PIA) for high-risk processing.
- Appointment of a DPO (Data Protection Officer) where required.
- A procedure for handling data subjects’ requests.
- A procedure for handling personal data breaches.
Sector-specific regulations
- Health: CE marking and compliance with Regulations (EU) 2017/745 (MDR) and 2017/746 (IVDR) for medical devices, under the supervision of the ANSM (French medicines and health products agency).
- Finance: ACPR (French prudential supervision and resolution authority) or AMF (French financial markets authority) authorisation, PSD2 compliance for payment services, MiCA for digital assets.
- Energy and environment: ICPE authorisations (installations classified for environmental protection), certifications, sector standards.
- Cybersecurity: SecNumCloud qualification, CSPN certification (first-level security certification), NIS2 compliance.
Dual-use and export controls
Technologies with both civil and military uses are subject to Regulation (EU) 2021/821. A review is required for:
- Advanced cryptography.
- High-performance computing and specialised chips.
- Drones and autonomous systems.
- Sensitive biotechnologies.
- Advanced materials.
Area 5: technological maturity (TRL)
The TRL (Technology Readiness Level) scale, commonly used by public and private funders, defines 9 levels of maturity:
- TRL 1-3: scientific principles observed, concept formulated, experimental proof.
- TRL 4-6: validation in the laboratory, then validation and demonstration in a representative environment.
- TRL 7-9: prototype in real conditions, system qualification, commercial operation.
The investor seeks to:
- Have the stated TRL validated by an independent expert.
- Identify the missing technical milestones (moving from TRL 6 to TRL 7 often requires industrialisation and certifications).
- Anticipate the cost and time needed to reach a marketable TRL.
- Spot gaps between marketing communication and technical reality.
Other points investors look at
- Customer contracts and partnerships: duration, exclusivity, assignment clauses, MAC clauses.
- Pending or potential disputes: litigation with customers, former employees, competitors.
- Financial commitments: bank debt, convertible bonds, guarantees given, long leases.
- Research Tax Credit (Crédit Impôt Recherche, CIR): base correctly calculated, justified, not rejected by the tax authorities.
- JEI status (Jeune Entreprise Innovante, young innovative company): eligibility, correct application of the social security and tax exemptions.
- Bpifrance, ADEME and regional grants: eligibility conditions met, repayment schedules where applicable.
- Transferable critical assets: servers, cloud access, administrator accounts, code in private repositories.
How a due diligence typically unfolds
- Non-binding term sheet signed after initial meetings.
- Set-up of a secure data room by the start-up, with NDAs signed by the parties involved.
- DD questions issued by the investors’ advisers (typically 50 to 200 questions).
- Topic-specific meetings: technical, legal, financial, commercial.
- Due diligence reports: typically a legal report (investor’s lawyer), a technical report (external expert), a financial report (audit).
- List of conditions precedent: corrections to be made before signing.
- Closing: signing of the legal documents (shareholders’ agreement, warranty and indemnity (garantie d’actif et de passif), ancillary agreements), transfer of funds.
Common pitfalls for start-ups
- Missing or disorganised documents: a poorly prepared data room slows the process and worries the investor.
- Rights assignments not regularised: a freelancer or co-founder without a written assignment triggers a blockage.
- Inconsistent cap table: discrepancy between the BSPCE granted and the fully diluted table presented.
- GDPR neglected: no DPA with processors, empty record, generic policy.
- Overstated TRL: marketing communication goes beyond technical reality, and the expert detects it.
- Undisclosed disputes: clear bad faith, grounds for withdrawal and for a claim under the warranty and indemnity.
- Forgotten commitments: change of control clauses in customer contracts, which may trigger termination when the fundraising takes place.
Preparing for due diligence in advance
A well-prepared start-up can shorten the DD and negotiate on better terms. Recommendations:
- Set up an internal data room from the seed stage, updated as you go.
- Carry out an annual IP review with an intellectual property lawyer.
- Carry out a GDPR audit at each growth stage.
- Document JEI status, the CIR and grants received.
- Keep a register of critical contracts with their sensitive clauses annotated.
Due diligence is the moment of truth for a deeptech start-up. How well it is prepared shapes the success of the fundraising and the quality of the relationship with the investor. Every situation is different and calls for a case-by-case analysis.
Further reading
Our full guide: Deeptech lawyer.
Related articles
- University spin-off: how to transfer a technology from the laboratory to the start-up? (in French)
- How to reward researchers and scientific advisers (BSPCE/BSA)?
- Patent vs trade secret: which strategy for a deeptech start-up?
For assistance: due diligence lawyer: acquisition audit.