Should you use open source code in your product? It all depends on the license

Thursday May 15, 2014 by Steve Charkoudian - Partner, Goodwin Procter

Open source software licensing can be a murky and complex area, causing many companies to want to avoid it completely. But for many tech startups, the promises of low-cost and speed-to-market can make using open source software an enticing proposition. However, basing your commercial product or service on open source software without understanding the terms of the license can be detrimental to the success of your company and could even kill future investment and acquisition opportunities.

The challenge for founders is to understand open source licensing terms so the software can be used without jeopardizing the confidentiality of your own source code, or the integrity of future revenue streams. Consider these three tips when evaluating whether or not to use open source to build your software product or the platform from which your service will be delivered:

Understand the common types of open source licenses – Open source software licenses generally fall into two categories: non-viral open source licenses and copyleft licenses. Non-viral open source licenses include some of the most permissive licensing options (e.g., the BSD, Apache, and MIT licenses). Under these licenses, the software code is often available for public use with minimal (if any) restriction. On the other hand, copyleft licenses (e.g., the GNU General Public, Lesser General Public and Affero licenses, and the Mozilla Public License) carry varying degrees of conditions on the software that you develop and use with the open source software. It is important for startups to be aware of the applicable conditions when they are leveraging open source software code with copyleft licensing terms. Depending on the type of copyleft license, some or all of a company’s nonpublic code may become subject to the terms of the open source license, even if the open source component that is used is only a small portion of the overall software solution. This can have an extreme impact on the valuation of the company. 

Establish an open source policy and enforce it – Most founders do not have time to monitor their development operations full time, so they need to implement an easy-to-understand open source policy that ensures developers do not inadvertently put the company in jeopardy. Make sure your software developers know which open source licensing options you are willing to use so they do not use code that is subject to terms that could be problematic for the company. Too often developers faced with a deadline incorporate available code without fully appreciating the license terms. Developers need to understand there will be consequences for this kind of action, and founders should regularly monitor their portfolio of open source licenses to ensure compliance with company policy.

Know when to go to your lawyer and what questions to ask – If you have questions about the open source code you would like to use, it is important to seek guidance from your lawyer in order to understand the different licensing terms. In the event of a funding or acquisition opportunity, the investor or buyer is going to want to know how you developed your software, and to what extent open source code was used. And, if it is used, they will want to understand the licensing terms.  Not knowing the licensing terms or utilizing code that in turn makes your software open source can have a profound impact on the valuation of your company and, ultimately, the potential for a desirable liquidity event.

Ultimately, open source software can be a good resource for a startup building its product or service platform. However, it is imperative to identify the types of open source code you are planning to use and understand the licensing terms in order to build a successful offering that will garner high valuation when it comes time to pitch investors or potential buyers.

Steve Charkoudian is a partner and chair of Goodwin Procter's Technology Transactions Practice and a regular contributor to Founders Workbench, a free business and legal resource for startups. He advises startups and early-stage companies about: Technology and intellectual property transactions, including technology transfers and licensing; Collaboration, strategic alliance and joint development agreements; Open source issues; and Due diligence and other intellectual property issues in mergers, acquisitions and venture capital and private equity transactions.

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