You have 12 contractors. Maybe 15. Some have been working with you for two years. Now a private equity firm is running diligence on your company. Their first document request: contractor files.
You open your shared drive. You find a mix of signed agreements from some contractors, nothing from others, a few W-9s from 2021, and no 1099 history in one place. The IP assignment clause? You’re not sure if it’s in any of the agreements.
The deal slows down. Your valuation takes a haircut. Or the conversation ends entirely.
This is preventable. Here’s exactly what goes in the file.
What the File Contains
A contractor documentation file isn’t complicated. It’s five things, consistently maintained, in one place.
1. A signed services agreement with an IP assignment clause
This is the one most companies get wrong – or skip entirely.
The services agreement covers scope, payment, and confidentiality. That part most founders understand.
The IP assignment clause is what gets missed. Without it, the contractor owns the work they create. That’s not a technicality. That’s federal copyright law under the U.S. Copyright Act, though specific outcomes may vary based on the type of work, the nature of the relationship, and applicable state law.
If a contractor builds a core feature of your product, writes your training materials, or designs your brand assets – and there’s no assignment clause in their agreement – they retain ownership by default under most circumstances. The specific legal analysis may vary depending on the work created, the contractual relationship, and the jurisdiction, but the general principle holds: without an explicit written assignment, ownership typically remains with the creator.
I see this surface in diligence constantly. An acquirer asks who owns the IP. You say “we do.” They ask for the agreements. The assignment language isn’t there. Now you have a problem.
The fix is one clause. It needs to be in every contractor agreement before work begins. While the specific language should be tailored to your situation and reviewed by counsel familiar with the laws of your jurisdiction, the core principle is universal: explicit written assignment of intellectual property rights.
2. A completed W-9
Basic, but missing more often than it should be. You need this before the first payment, not at year-end when you’re scrambling to issue 1099s. Collect it at onboarding.
3. 1099 history
Keep a record of what you’ve paid each contractor and when. This doesn’t need to be elaborate – a simple log or export from your accounting system works. What matters is that it exists, it’s accurate, and you can produce it quickly when asked.
4. Proof of the contractor’s business entity
A copy of their LLC registration, EIN confirmation, or business license. This is evidence that they’re operating as a business, not just an individual you’re paying like an employee.
This matters for two reasons. First, it supports the classification argument if you’re ever audited – though it’s important to note that business entity status is only one factor among many that agencies consider in worker classification analysis, and the weight given to this factor may vary by jurisdiction. Second, acquirers and lenders want to see it. It signals that your contractor relationships are structured, not informal.
5. Evidence of independence
This is the documentation piece most companies never think to collect.
Worker classification audits look for signs that a contractor is functionally an employee – exclusive work for you, your equipment, your hours, your supervision. The specific factors examined and their relative weight vary by jurisdiction and the applicable legal test (IRS common law test, economic realities test, ABC test in certain states, etc.).
The way you counter that is with evidence of independence: documentation that they work with other clients, use their own tools, and operate on a project basis with defined deliverables rather than ongoing direction from you.
This doesn’t have to be formal. A reference in the services agreement to project-based scope, an email confirming they have other active clients, a statement of work with defined outputs rather than hours – these all help. The sufficiency of this evidence will depend on the totality of circumstances and the specific legal standards applied in your jurisdiction.
Why This File Pays for Itself
Diligence is the obvious moment. But it’s not the only one.
Lenders running a credit facility review will ask about contractor exposure. Auditors will want to see classification support. If a contractor ever disputes ownership of work they created, the file is your defense.
The cost of building this file is a few hours of setup and a quarterly maintenance routine. The cost of not having it shows up at the worst possible time – when you’re trying to close a deal, secure financing, or defend a classification decision.
How Embedded Counsel Keeps This Current
The contractor file isn’t a one-time project. It’s a living record that needs quarterly attention.
As part of our work with Premium tier clients, we review contractor agreements on a rolling basis – checking that IP assignment language is in place, flagging agreements that need updating as relationships evolve, and ensuring the classification evidence stays current.
It takes about 30 minutes per quarter. It’s the kind of thing that never feels urgent until it suddenly is.
If you have contractors working with you right now, the question worth asking is simple: could you produce a complete file for each of them in the next 24 hours?
Most companies can’t. Building the habit now is easier than rebuilding it under pressure.
What does your contractor documentation look like today? If you’ve been through a diligence process and this came up, I’d be curious what the acquirer or lender actually asked for – drop it in the comments.
The Garcia-Zamor Law Firm provides outsourced in-house counsel combining business law and intellectual property expertise. Led by Ruy Garcia-Zamor (founder and business strategy expert), Elliott Alderman (IP specialist with 40+ years experience), and Claudia Castillo (employment law specialist), our team serves growing companies with strategic legal leadership. Learn more at garcia-zamor.com or call (410) 531-9853.
