Mark: As we've talked about before, the M&A sale process is very time-crunched. It’s very chaotic. There are lots of moving pieces. And target companies find themselves being reviewed in diligence by an army of buyers. In the tech space, intellectual property ownership is key. And rather than waiting until you're in the heat of the fire, we advise clients to be mindful of things that the buyer will be concerned about from the outset and to build their technology with that in mind. What are a couple of the key areas of general IP corporate hygiene that companies can be aware of and be prepared for once they get to a sale process?
Sarah: Two topics that go right to the core of IP ownership and clean use rights are independent contractor developments and the use of open-source software. Contractors are a helpful resource to startups that often don't want to onboard an employee full-time. But you have to keep in mind that absent a written agreement that specifically states an IP ownership transfer in favor of the company, the contractor retains ownership over IP they develop. Tracking down a contractor later down the road, if that person is not on your team anymore, to do some cleanup work and enter into cleanup documents is sometimes hard. You might not be in touch with them anymore, and it might take some time to track them down and be costly to incentivize them to enter into those documents after the fact.
The other area, open-source software, is tricky because open-source software components are governed by different licenses. There’s a category of licenses that attaches the use of the open-source software component to the obligation to give back to the open-source community. What that means is you’re required to disclose the proprietary source code with which you use the open-source software to the open-source community and the general public. For a buyer, that can be a problem because they are looking to commercialize your software, and if it's available to everyone for free, there is less to commercialize. So on the open-source front, buyers want to be compliant going forward when they integrate your software and other technology.
Mark: As in many things in life, it's easier to keep track of that as you go as opposed to trying to recreate it later. And then on the contractor issue, the paramount issue for buyers is ascertaining and being convinced that the target company owns the IP that's critical to the value they're buying. And contractors is a “got-you” that oftentimes, if you’re moving fast and breaking things and asking for forgiveness after the fact, you don’t get that quite right and you have to jump through a lot of hoops in order to get it right to be able to sell to a buyer.
Sarah: Correct. Having a good form with a contractor and an open-source software policy from the get-go is how you can avoid it.