Businesses working in the modern digital business environment often encounter common issues during procurement, product review or when customers do their due diligence on a product or service.
Many have experience of scrambling around to find copies of long-forgotten documents or rushing to put agreements in place where there are none. They fear that any resulting delays will cause deal fatigue, a re-think on valuation or for the customer to walk away.
Tales of such scenarios can seem like rites of passage – “you haven’t done a deal unless you’ve had to do xyz to keep the customer sweet”. In most cases teams overcome their problems, even if there is some scrambling. Winging it usually works without the team encountering too many problems. It might even mean that the customer is impressed by the team’s dynamism, unaware of the action behind the scenes. When it happens during a funding stage, it may even still be possible to attract crowd funding and angel investors who are prepared to take a punt on other factors, such as the vision of the management team, the promise of their technology, or a book of closed orders.
As businesses scale though, so do opportunities and, crucially, risks. The big deal is the one that counts, and that is where businesses find that the questions become more detailed – and that they must have answers and documents to back them up. They must show that they know their contracts with suppliers, licensors and customers inside out. Sometimes this is where the customer or buyer points out an issue, such as a clause that restricts what you can do with an agreement, causing the team to break into a collective cold sweat when they realise that the counterparty will leverage their need to amend the agreement. They may even have repeated the same problematic clause in many of their other customer contracts.
Being prepared early in the lifecycle of the business will make all stages of a transaction smoother and should make them quicker. It will also secure that big transaction, protect value and ensure resources are used efficiently.
Here are some of the common issues that cause those cold sweats, and potential ways to overcome them:
Ownership
It sounds like a given that you own your product, but it is surprisingly common to find that a business doesn’t own quite what it thinks it does. Developers often use software or code under license from the author. This saves time and investment. Apart from being common practice, it is perfectly good practice, if it is done right. The key is to understand whether the terms of the licenses permit the software or code to be used in the way the business is using it for as long as the business needs and, if the asset is to be sold, in a way that can be transferred to the new owner.
Remediation can include analysing terms to ensure that they enable the business to operate as intended and putting a plan together to deal with any issues to know what happens in future scenarios.
Intellectual Property
Software businesses rarely write all their code in-house. When using external consultants to write code, there is often an assumption that the intellectual property in that code belongs to the client. When a due diligence query prompts a check, it can be a difficult time to discover that it depends on the terms of the agreement with the consultant. Similar issues arise with licensed software and code. There may be terms in the licenses that infer rights on other parties, such as requiring the company to make its code available to third parties. Even if the business took advice at the time that the agreements are entered into, it is a good idea to have a consistent strategy and to maintain a constant record of the rights the business has in software and code – and to know the options should the license be imperfect, due to expire or restricted from use in onward services to a customer.
Businesses may be confident that they have protected their intellectual property, but often they have taken a narrow view of what constitutes intellectual property and may have missed one or more of registered rights, copyright, databases, design rights, name, logo, website, and domain names. Where intellectual property is difficult or costly to protect, businesses sometimes choose to treat confidential information as a trade secret. For a customer, that may mean that they cannot receive code in escrow, or have access to the underlying code in a product, making integration and continuity an issue for them.
One way to anticipate issues is to plan for them by creating an intellectual property strategy – a useful framework for knowing and recording the protections the business has in place, why the management team has decided on those particular protections and the advice that it has taken. A management team that knows its intellectual property portfolio inside out and has a clear a rationale for its strategy will be in a much better position to keep customers, investors, or a potential buyer on side.
Data
A common mistake is to assume that data bought by a business or specifically sourced for a business is freely usable by it for any purpose. In fact, data providers often place restrictions in the license agreement that may mean that a business is using data in breach of the license, or worse, that it has trained a model using data in breach of the license. This can draw into question whether you have compromised the ownership of intellectual property in that model. It is also alarmingly common for developers to scrape data from websites, including text, audio, video and databases – all of which may be in breach of the website terms and the intellectual property rights of the owners – and to store it without appropriate labelling and metadata to enable it to be identified. If required to identify and remove data, or submit to an audit, it can be problematic to separate data, or identify where it may have been used. This is avoidable, and together with other guardrails, a clear policy and procedures for data sourcing can help to prevent this scenario from arising.
To protect the business’ own data, in addition to relying on copyright, design rights, registered rights, database rights, and cyber-security measures, the business can prohibit scraping in the website terms and conditions. An additional protection – both in practical terms and to raise in enforcing rights – is to consider placing anything that the business doesn’t want unknown third parties to use behind a paywall.
These are only a few of the issues faced during key dals in the digital environment. There are many more issues, including regulated areas, use of generative AI tools and large language models.
The first step to identifying relevant issues for your business is to review everything that you currently have in place. A lawyer can work with you to create a strategy to ensure that you know (1) what you have, (2) what you should have, and (3) what to prioritise to set you up for smoother transactions in the future. The strategy would include a detailed follow-up review to identify potential pitfalls and, where required, plan for remediation.
James Teare
Commercial and Technology Partner
