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The software giant did not disclose the size of the stake, although the investment should help it solidify its position in the burgeoning field of digital rights management, the company said.
Xerox will retain majority ownership of ContentGuard, which protects and manages electronic content transmitted over the Net, including books, music and software.
Other investors are expected to take stakes in the company, formerly known as the Xerox Rights Management group.
Although the Internet may seem like an ideal venue for distributing books, video and music, the medium is unlikely to be trusted by publishers and authors until there is greater confidence that they can control piracy of their intellectual property.
The digital rights management sector is already crowded with both young companies and technology giants trying to gain the upper hand. Smaller firms such as Sunhawk, InterTrust and Preview Systems are competing with the likes of Microsoft, Xerox, IBM and AT&T.
ContentGuard will offer some products jointly with Reciprocal, another intellectual property management company that has investments from both Microsoft and Xerox. Microsoft last year pumped $15 million into Reciprocal.
ContentGuard's technology, originally developed at the Xerox Palo Alto Research Center in California, will continue to receive support from other Xerox patents. Microsoft said it plans to use ContentGuard's technology in its own digital rights management products, including its eBooks device, which goes on sale this summer. ContentGuard technology also will enhance future releases of Windows Media Player and Windows Media Rights Manager.
"This is the first time that two major companies such as Xerox and Microsoft have partnered to bring digital rights management to the masses," Alan Weintraub, a research director at Gartner Group, said in a statement.
