Transactions involving software companies may raise some unique intellectual property issues. Knowing these issues in advance is important to preventing a potential deal-stopper from emerging and delaying a closing—or preventing it altogether.

Here are four steps companies can take (based on issues a seller will likely consider and inspect in connection with its due diligence) to prepare an intellectual property portfolio with significant software assets for a sale. This list is not inclusive, but rather focuses on some key considerations that may be easy to correct or address.

1. Understand The Use Of Open Source Code

Buyers are becoming more and more aware of the risks and potential liabilities associated with open source code—and the increasing use of open source code as developers “cut and paste” code from various projects.

Open source code is freely distributed but still subject to certain license terms, and some open source licenses contain terms that a potential buyer will consider unfavorable. For example, some open source license agreements require that all software incorporating its code must be licensed or distributed in a way that makes it part of the free software/open source community. Open source licenses may also include requirements for distribution of source code to licensees or third parties, patent license requirements on distribution, restrictions on future patent licensing terms, or other restrictions of the exercise or enforcement of intellectual property rights related to the software containing the open source code. Other licenses have more acceptable terms, such as an attribution requirement to acknowledge the author/creator.

A prospective buyer may require representations and warranties that the company’s proprietary software does not contain any open source code. Alternatively, the buyer may propose a representation that the company’s proprietary software does not incorporate, link to, interface with, or otherwise interact with any open source code in any manner that would require disclosure of the proprietary source code to the public. Even in transactions where software is not a critical asset, a buyer may focus on the use of open source code in proprietary software and delay the deal based on any uncertainties or questions that the seller cannot answer.

Avoid this potential pitfall by understanding how (and if) your company uses open source code. Decide whether your company will permit the use of open source code in its proprietary software. Establish a robust process for keeping track of all open source code, how it is used, and the licenses that apply. Have a written policy regarding the use of open source code that all developers (including outside consultants) must sign. Consider requiring all developers to list all open source code incorporated into the software and identify which license applies.

It may be difficult to determine if open source code is used in certain software, particularly if the software developers were outside consultants or terminated former employees. In this situation, consider conducting an audit/scan of the software (with a company like BlackDuck) to determine what open source code is used and the applicable open source license that applies.

2. Know Your Brands