The paper studies the knowledge diffusion risk in shaping inter-firm contractual design. While knowledge diffusion through takeover of licensees may improve licensing value due to acquirers’ superior capacity, it arouses licensors’ concerns about proprietary harms. The licensor weights these costs and benefits and defines the boundary of knowledge diffusion through assignment clauses. We find that licensee takeover risk increases the usage of restrictive assignment clauses, wherein licensors retain decision rights about the assignability of their know-how to the successor of a licensee takeover, suggesting the dominance of proprietary concerns. The effect is stronger when licensors have greater concerns about proprietary harms but weakens when the benefits of knowledge diffusion through licensee takeover are greater. Further analyses reveal that constraining knowledge diffusion to safeguard proprietary information may compromise collaboration value. Finally, the consequence test shows that a restrictive assignment clause can effectively reduce licensee’s future takeovers in a competitive market when licensees have higher takeover risks.