IT Intellectual Property pitfalls: contractors and open source software
A large proportion of the work we do with our clients to help them get ‘investor’ ready is securing their intellectual property rights. With IT companies the intellectual property position is the stuff that we have to investigate with a fine toothcomb. Yes, the devil is really in the detail! Or, as we often find, who actually owns the copyright in the code! The reason this matters so much is that if in fact the company does not own the copyright itself it is not an asset of the company and it is not free to do what it likes with the code - it is dependent on the terms of the license from the outside company or person. It also means that it is not entirely free to decide whether or not to take action to stop infringers. These issues go right to the heart of valuing the IP.
Firstly, what do we mean by copyright? And why is it important?
At a very simple level copyright will be created in material that is original and not copied from anyone else. For anything that involves software, the copyright is likely to be the most important part of the intellectual property regime. Because copyright is the most valuable part of an IT software business, an investor will want to know that the company, which they are about to buy into, owns the copyright and hasn’t ripped it off from elsewhere. This is why we spend a large proportion of time checking who has developed the code (and in what capacity) and how the copyright has been developed.
The ideal scenario for copyright
The simplest scenario is for a software house to have developed all of its code in-house by its permanent employees. This means that the copyright of the coding is owned entirely by the software house that employed the coders. However, this simple scenario can often be challenged for two reasons: software houses often use contractors within their coding workforce and software developers often use open source coding.
Are your coders employees or contractors?
Whilst this may seem an innocuous question, it is actually a very important distinction when analyzing copyright ownership. If, as many software houses or companies do, you have hired contractors to help develop the coding, then in the absence of a proper written agreement with the contractor, the coding copyright will belong to the contractors, rather than the company who commissioned the coding. This is the case even if you have hired them specifically to develop a portion of coding.
If we come across this scenario, where contractors or interims have been involved in developing the coding, we will want to make sure that a contract is in place to make sure that the copyright of the coding is wholly owned by the company, not the contractor who wrote the coding. To use the correct legal terminology we are looking for the existence of ‘assignment of Intellectual Property Rights (IPR)’ when a company has used interims, contractors or external software developers to write coding for them.
With the nature of today’s very mobile IT workforce, the assignment of intellectual property rights is something that needs to be dealt with, ideally before any code is written.
Open source software and coding
You would think that anything, which stops you having to reinvent the wheel, would be a good thing? As a consequence, open source software or coding, i.e. code, which is available without payment, is very commonly used. In fact, many software developers may not even know that they are using open source coding or software.
The issue with open source coding is that whilst it is free to download and use (ie. you don’t have to pay for it), it is often not free from restrictions and conditions of use. This is because the software is nevertheless subject to a license. These licenses are range from the very brief to the very detailed. From a valuation point of view, the poison pill is those licenses that require as a condition of use that anything you develop with that coding – or modified coding – has to be provided free-of-charge back into the public domain again. As you can imagine, this can have a very negative impact on the valuation of any piece of software you are looking at, since the competitive advantage provided by the exclusivity of the software is destroyed (after all, why pay a license fee to use software that you can acquire for free from the open source community?)
The ‘so, what?’ question
Any valuation of a software business or product will be heavily influenced by who owns the copyright for the coding. Fail to secure the copyright – or neglect the open source coding licenses terms – could dramatically impact on the valuation of your product or company.