Ownership of Code and Working with Offshore Developers
We are helping more and more clients either buy or sell SaaS businesses. These are exciting times and our expertise continues to grow along with our client base. This article addresses an issue that has created some unnecessary complexity in a few of our recent deals.
You don’t have to be able to code or be technically minded to build or operate a SaaS business. The same technology that makes SaaS businesses such an appealing prospect allows owners to work with software developers remotely. Working with offshore developers can be great for starting and operating a SaaS business. Where a software developer lives can have a drastic impact on how much that developer needs to be compensated. It is common to hire developers in India or Eastern Europe, and increasingly companies are hiring developers from South America as well for just these reasons of geo-arbitrage. Hiring offshore developers is not a panacea, though, and there can be drawbacks. For some SaaS business owners, the language barrier of working with developer teams in certain parts of the world is problematic; for others, differences in time zones and working hours cause more headaches than desired.
There is an important legal consideration that you should understand before you hire offshore developers, one that you might not otherwise realize until you are under LOI to sell your business and it will be more costly to remedy. This is an extension of the admonition we give clients to make sure all of their contracts will developers contain the magic words that make it clear that the company is the owner of the code those developers to write on behalf of the company.
If you hire an offshore software development company and not just individual developers, then you also need to make sure that the contracts between that company and its developers (whether contractors or employees) are in order so that no one other than your company will ultimately own the code. It is best to both review their contracts and insert a clause into your contract with the offshore software development company forcing them to represent that they are the sole owners of the code you are paying them to hand over to you so that you will be able to go after them if their own contracts are inadequate. The reason this is so important is that as a seller, you will almost always be required to represent or guarantee to the buyer that you are the sole owner of the code; if it turns out that some third party has a claim to ownership, then a buyer may not consummate a transaction or there may be an indemnification claim by the buyer that will lower the total amount you as the seller receive for selling your business. These considerations apply equally to working with U.S.-based software development companies, but in our experience U.S.-based software development companies have a better understanding of the law surrounding ownership of code and so these problems arise less often.
If you need assistance in reviewing particular contracts with software developers or software development companies, or if you are a buyer or seller of a SaaS company and you need assistance conducting the due diligence process and preparing all of the necessary legal documents to complete the transaction, contact us at firstname.lastname@example.org and we will be happy to discuss how we can work together to bring your deal to fruition.