How Using Open-Source Software Can Affect Your Company's Value

Understanding and complying with open-source licensing requirements is critical to preserving your company's value during an IPO or acquisition

By Mark H. Wittow and Jessica C. Pearlman
Wed, December 16, 2009

CIOOpen-source software is an increasingly popular software development and distribution model that may spread further in the face of financial constraints in our current economy. With publicly available source code generally offered without charge, it is tempting to look to open source for potentially significant cost savings in this time of need.

But not so fast. While proponents of open source proclaim the benefits of "free code," it might better be compared to the free puppy offered to a good home. The "puppy" may come at no initial cost, but the ongoing maintenance and undisclosed hidden dangers may create unforeseen hassles in your corporate home. Open source has complex legal restrictions that can create copyright and patent compliance issues and corporate transaction challenges for companies that rely heavily on customized software or that distribute software to partners or customers.

In 2004, the Federal Reserve, FDIC and other federal financial regulatory agencies outlined various strategic and legal risks of using open-source software in the jointly issued guidance notice "Risk Management of Free and Open Source Software." Public company disclosure statements also demonstrate open-source issues. In their annual reports, many public companies note their use of open source as a risk factor to their businesses, while others go as far as to highlight their lack of open source as a positive factor. Private companies seeking to be acquired have seen their valuation drop, or have seen acquisitions fail altogether, as a result of open-source software discovered during the due diligence process.

To read more on this topic, see: Wall Street Software Scandal: When Does Open Source Become Proprietary Code and Open Source - Dirty Code, Licenses and Open Source.

Any doubts about the enforceability of open-source software licensing restrictions in practice have been put to rest by recent court decisions. At the same time, the use of open-source software is expanding rapidly, and even commercial software companies often provide open-source licensing options and opportunities.

Open-Source Licenses Are Complex

The Open Source Initiative standards group has approved nearly 70 open-source licenses, each with different terms. These licenses typically fall into one of two categories. The first is described as an attribution-type license, and it generally imposes few obligations beyond requiring that an acknowledgement of the authorship of the software be included in some manner, such as in source code comments and help files.

The second, more common and more demanding type of open-source license is the reciprocal-type license, also known as a "viral" or "copyleft" license. Reciprocal-type open-source license terms can be complex and ambiguous. Generally, any company that uses open source and either modifies or distributes it will need to have a thorough program in place to ensure compliance with the applicable licensing requirements.

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