When your startup reaches the difficult point of insolvency or dissolution, one question rises above the noise: what happens to the intellectual property you've spent years building? For many tech companies, IP represents far more than a line item on a balance sheet. It's the product of countless late nights, pivots, and hard-won breakthroughs. According to a report from Ocean Tomo, 95% of the market value of the S&P 500 comes from intangible assets, underscoring just how central intellectual property has become to business value.
Understanding how IP is treated during insolvency isn't just about legal compliance. It's about protecting what you've created, preserving options for your next chapter, and ensuring you don't inadvertently create problems that follow you for years. This guide offers a practical overview of how intellectual property works during a startup shutdown, what might limit your ability to transfer or sell it, and what you should review before making any decisions. This isn't legal advice, but rather a resource to help you understand the moving parts.
This article focuses primarily on out-of-court wind-downs and dissolutions. Bankruptcy introduces additional rules, court oversight, and processes that can materially change how intellectual property is handled.
Who Legally Owns the IP When the Company Is Insolvent
Even when the bank account is empty and the runway is gone, your company's intellectual property still belongs to the corporate entity, not to you personally. This is a point that catches many founders off guard. You may have written the first version of the code yourself. You may have filed the patent application. But if those assets were created during your employment or were properly assigned to the company, they belong to the business.
Neither employees, contractors, nor investors own the IP unless specific agreements grant them certain rights. The IP remains a corporate asset until it's formally sold, transferred, abandoned, or assigned as part of an orderly wind-down process.
Common categories of startup IP include source code and code repositories, patents and patent applications, trademarks and brand assets, copyrighted materials like documentation and marketing content, databases and proprietary datasets, and trade secrets including algorithms, processes, and customer insights.
These assets cannot be distributed informally during a shutdown. Consider a scenario where two co-founders decide to simply split up the codebase between themselves before closing the company. Without proper board approval, documentation, and fair market value assessment, this informal division could expose both founders to legal challenges from investors, creditors, or even future employers conducting due diligence.
How Secured Creditors Affect Rights to IP
If your startup has taken on venture debt or other secured financing, the lender's rights may be the single most important factor in determining what you can and cannot do with your IP during insolvency.
A secured creditor holds a legal claim on specific company assets. Many startup lenders file blanket liens, often reflected in a UCC-1 filing, that cover “all assets” or “general intangibles.” That language typically includes patents, trademarks, copyrights, trade secrets, and other forms of IP. Because early-stage companies often lack traditional hard assets, IP is frequently a core component of the lender’s collateral package.
If secured debt exists, founders may face meaningful constraints. Transfers, sales, or licenses of IP may require lender consent. Proceeds from any asset sale may need to be applied directly to the outstanding debt. In some cases, dissolution itself may be restricted until liens are released. Even after operations cease, IP can remain encumbered until the lien is formally terminated, typically through a UCC-3 filing.
As a practical matter, one of the first steps in shutdown planning should be reviewing loan documents and checking for UCC filings against the company, which are usually searchable through the applicable Secretary of State website.
What Happens to IP if the Company Has No Secured Creditors
If there are no liens on your intellectual property, the company generally has more flexibility. The company can generally sell, license, or transfer IP as part of an asset sale, following proper corporate procedures. In some cases, founders may be able to reacquire certain IP through a properly documented transaction at fair market value. IP can be included as part of a structured shutdown plan with clear documentation. If the IP isn't sold or transferred before dissolution completes, it may be considered abandoned.
Even in the absence of secured creditors, corporate formalities still matter. Asset dispositions typically require board approval, appropriate documentation of any transfers, and compliance with shareholder agreements and applicable state law.
For example, if a founder wants to buy back a domain name or trademark to use in a future venture, the company should document board approval, address conflicts of interest, support the transaction with a fair market value assessment, execute a proper assignment agreement, and ensure the transfer does not violate obligations owed to minority shareholders or option holders.
Contractual Rights That May Limit IP Transfer
Beyond lenders, a web of other agreements may restrict what you can do with IP during insolvency. These restrictions are easy to overlook in the stress of a shutdown but can materially affect what is permissible. Customer agreements may contain provisions relating to IP ownership, exclusivity, or source-code rights. Vendor or development contracts can often involve joint ownership or arrangements or restrictions on transfer. Licensing agreements often prohibit assignment without consent. If your product incorporates open-source software, applicable licenses govern how that code can be distributed or reused, and some licenses impose obligations on derivative works.
Additional complexity can arise if the company received federal grants (such as SBIR or STTR funding) or developed IP in collaboration with a university or research institution. These arrangements frequently impose reporting requirements or retention rights that survive shutdown.
These are just examples, not an exhaustive list. Any company with regulated funding, joint development, or licensed technology should assume additional restrictions may apply. Before making decisions about IP during shutdown, founders should conduct a thorough review of key contracts to understand what's actually permissible.
Can Founders Keep or Reuse the IP?
Many founders wonder whether they can personally acquire or continue using the company's IP after shutdown. The answer is often yes, but only through proper channels.
Whether a founder reacquires IP or it is sold to a third party should be evaluated based on the company’s specific obligations, creditor position, and the interest of all stakeholders.
Intellectual property is a company asset, treated no differently than equipment or cash. In certain scenarios, particularly bankruptcy, asset disposition is subject to court supervision and bankruptcy-specific rules, and assets are often sold through a formal process that can produce outcomes very different from an out-of-court wind-down.
Outside of bankruptcy, founder reacquisition typically involves several steps: documented board approval (with conflicts disclosed and managed), a fair market value assessment to mitigate self-dealing or fraudulent-transfer risk, secured creditor consent and lien release if applicable, and properly executed assignment documentation.
Founders should be particularly cautious when creditors remain unpaid. In some circumstances, improperly transferring IP or other assets may later be challenged as a fraudulent transfer. Simply taking code, customer lists, or other IP without a documented transfer creates real legal exposure and can follow you into future ventures.
What Happens to IP During Formal Dissolution
If a company completes dissolution without explicitly addressing its intellectual property, the outcome depends heavily on state law and the steps taken during wind-down. State approaches vary. In Delaware, unliquidated assets of a dissolved corporation generally remain the legal property of the entity and may be dealt with after dissolution through a trustee or receiver appointed by the Court of Chancery. Other states take different approaches, which can result in ambiguity if assets are not formally transferred before dissolution.
When IP is left unresolved, practical consequences often follow. Patents and trademarks may lapse if maintenance fees or renewals are not paid. Copyrights may continue to exist but become difficult to exploit without clear ownership. Trade secrets may lose protection if they are no longer properly safeguarded. Where secured creditors hold liens, unaddressed IP may remain encumbered even after the company ceases operations.
Properly documenting the disposition of intellectual property as part of a shutdown helps avoid uncertainty and preserves optionality for founders and investors going forward.
How SimpleClosure Helps With IP During Insolvency
Handling intellectual property during a shutdown involves navigating secured creditor claims, reviewing contracts, coordinating with counsel, and ensuring proper documentation. For founders already dealing with the emotional weight of closing a company, this complexity can feel overwhelming.
SimpleClosure helps founders bring structure and clarity to this process. We help identify liens or secured creditors that may affect IP, organize loan documents, contracts, and UCC filings, and track asset disposition as part of a compliant wind-down. We coordinate with your legal and financial professionals to ensure operational steps align with their guidance and that nothing is overlooked that could delay dissolution or create future complications.
Note: SimpleClosure is not a law firm and we do not provide legal advice. What we do is help founders handle the operational complexity of shutdown with clarity, structure, and support, so you can focus on what comes next.
Closing Thoughts
Intellectual property doesn't disappear when a company becomes insolvent. It remains an asset that must be handled with care, in accordance with creditor rights, contractual obligations, and corporate formalities. Too often, IP is left unresolved during dissolution, not by design, but because it is overlooked. By understanding how IP is treated during a shutdown, founders can avoid surprises, protect their reputations, and preserve optionality for what comes next. The decisions made now can have lasting effects on future ventures, investor relationships, and clean exits from the past. If you're preparing for shutdown and want help understanding what documents you need to gather for IP and asset review, SimpleClosure is here to support you.