Open Source Compliance in Tech M&A Deals
Open source software is embedded in almost every modern technology business.
In many cases, it’s not just a small part of the product—it’s foundational. Frameworks, libraries, tools, infrastructure layers—open source accelerates development and reduces cost. It allows companies to build faster and scale efficiently.
But in a transaction, what made things easier during growth can introduce complexity during diligence.
Because open source is not “free” in the way many founders assume.
It comes with obligations.
And those obligations matter a lot in M&A.
At Legacy Advisors, this is one of the most common areas where tech-enabled businesses run into friction during diligence. Not because they did anything wrong—but because they didn’t fully understand how open source licensing impacts ownership, control, and transferability. It’s a recurring theme on the Legacy Advisors Podcast and reinforced in The Entrepreneur’s Exit Playbook (https://amzn.to/3NOnNVH): the way you build your business matters just as much as what you build—especially when it’s time to sell.
Open source is a perfect example of that.
Why Open Source Becomes a Deal Issue
From a developer’s perspective, open source is a tool.
From a buyer’s perspective, it’s a risk surface.
That doesn’t mean buyers avoid companies that use open source. Quite the opposite—it’s expected. But they want to understand how it’s being used and whether the business has complied with the associated licenses.
Because different open source licenses come with different requirements.
Some are permissive and relatively low risk.
Others impose obligations that can impact:
- How software is distributed
- Whether source code must be disclosed
- How derivative works are handled
- Whether proprietary components can remain closed
If those obligations haven’t been followed, it creates exposure.
And exposure changes the conversation.
The Misconception That Causes Problems
The most common misconception is simple:
“If it’s open source, we can use it however we want.”
That’s not how it works.
Open source licenses grant rights—but they also impose conditions.
For example, certain licenses may require that if you modify and distribute the software, you must also make your modifications publicly available. Others may require attribution, documentation, or specific handling of derivative works.
If those conditions are not followed, the company may be out of compliance.
And non-compliance creates risk.
In a transaction, that risk becomes visible.
What Buyers Are Actually Looking For
Buyers are not trying to eliminate open source from the business.
They are trying to understand:
- What open source components are being used
- Which licenses apply
- How those components are integrated into the product
- Whether the company has complied with license requirements
- Whether any licenses create restrictions on commercialization
This is not a surface-level review.
Buyers often bring in technical and legal experts to analyze the codebase, identify open source components, and assess compliance.
If issues are found, they don’t get ignored.
They get addressed.
The Real Risk: License Contamination
One of the biggest concerns in open source compliance is what’s often referred to as “license contamination.”
This typically arises with certain types of licenses that require derivative works to be distributed under the same license terms.
In practical terms, this can mean that:
- Proprietary code may need to be disclosed
- Restrictions may apply to how the software is licensed or sold
- The company may not have full control over its own product
Even if the risk is theoretical, buyers take it seriously.
Because it directly affects:
- Ownership
- Control
- Monetization
And those are core drivers of value.
Where Companies Get Into Trouble
Most open source issues don’t come from intentional misuse.
They come from lack of visibility.
Developers use libraries to solve problems quickly. Over time, those components become embedded in the product. Documentation may be incomplete. License tracking may be informal or nonexistent.
By the time the company is preparing for a sale, no one has a complete picture of:
- What’s in the codebase
- Where it came from
- What obligations are attached
That’s when diligence becomes difficult.
Because now the buyer is uncovering information that the seller doesn’t fully understand themselves.
And that creates uncertainty.
How Open Source Issues Affect Deals
Open source compliance issues rarely show up as a single deal-breaking moment.
They show up as friction.
That friction can lead to:
- Extended technical diligence
- Requests for code audits
- Legal review of licensing obligations
- Requirements to remediate compliance issues
- Delays in closing
In some cases, buyers may require:
- Code refactoring
- Replacement of certain components
- Documentation of compliance processes
All of this takes time.
And time introduces risk.
In more serious scenarios—particularly where core IP is affected—buyers may adjust valuation or deal structure to account for the uncertainty.
The Overlooked Signal: Process Maturity
Open source compliance is not just about the code.
It’s about how the business is run.
Buyers look for signs of maturity:
- Is there a process for tracking open source usage?
- Are licenses reviewed and understood?
- Is there documentation of compliance?
- Are developers trained on proper usage?
If the answer is yes, buyers are more comfortable.
If the answer is no, it raises broader questions.
Because if the company hasn’t managed this risk, what else hasn’t been managed?
Preparing Before You Go to Market
The best time to address open source compliance is not during diligence.
It’s before.
That means taking the time to:
- Inventory open source components
- Identify applicable licenses
- Review how those components are used
- Confirm compliance with license terms
- Address any gaps
This doesn’t require perfection.
It requires awareness.
Because once you understand your exposure, you can manage it.
The Strategic Advantage
Most founders underestimate how much this matters.
Open source doesn’t typically drive valuation on its own.
But it can impact certainty.
And certainty is what allows deals to move forward smoothly.
When compliance is clear:
- Diligence moves faster
- Buyers feel more confident
- Negotiations stay focused on value
When it’s not:
- Questions multiply
- Risk increases
- Leverage shifts
This is a recurring pattern across all areas of M&A.
The more predictable and understandable the business is, the better the outcome tends to be.
Final Thoughts
Open source software is a powerful tool—and a normal part of modern technology businesses.
But in a transaction, it needs to be understood, documented, and managed.
Founders often focus on what open source enables them to build.
Buyers focus on what obligations come with it.
The gap between those two perspectives is where issues arise.
The companies that navigate this well are the ones that treat open source not as an afterthought, but as part of their operational discipline.
Because in M&A, discipline creates confidence.
And confidence drives outcomes.
Frequently Asked Questions About Open Source Compliance in Tech M&A Deals
1. Why do buyers care about open source software in a transaction?
Because it directly impacts ownership, control, and risk.
Buyers fully expect technology companies to use open source—it’s standard. The concern isn’t the presence of open source, it’s how it’s been used and whether the company has complied with the associated licenses.
Different open source licenses impose different obligations. Some are very permissive, while others can require disclosure of source code or impose restrictions on how software is distributed. If those obligations haven’t been followed, it creates legal and commercial risk.
From a buyer’s perspective, the key question is simple: does the company fully control its product, or are there hidden constraints?
If the answer is unclear, diligence becomes deeper, negotiations become more cautious, and the deal can become more complex. It’s not about avoiding open source—it’s about understanding and managing it properly.
2. What is “license contamination,” and why is it a concern?
“License contamination” refers to situations where the use of certain open source licenses can impose broader obligations on the company’s proprietary code.
This is most commonly associated with more restrictive licenses that require derivative works to be distributed under the same terms. In practical terms, that could mean that parts of your proprietary software may need to be disclosed or shared under open source terms.
Even if that outcome is unlikely, the possibility alone creates concern for buyers.
Because it affects:
- Whether the company truly owns its product
- How that product can be commercialized
- Whether future growth or licensing strategies are constrained
Buyers don’t want to inherit uncertainty around core IP. If there’s a risk that proprietary assets are entangled with restrictive licenses, they will investigate it thoroughly—and may adjust deal terms accordingly.
3. How do open source issues typically surface during due diligence?
They usually surface through technical and legal review of the codebase.
Buyers often use specialized tools and advisors to scan the software for open source components. These tools identify:
- Which libraries and frameworks are in use
- The associated licenses
- Potential compliance gaps
In many cases, founders are seeing this level of visibility for the first time themselves.
That’s where friction begins.
If the company doesn’t have clear documentation of what’s being used and how it complies with license terms, the buyer may need to do additional work to understand the risk. That slows the process and can introduce uncertainty.
The issue isn’t necessarily that something is wrong—it’s that the seller doesn’t have a clear answer.
And in M&A, lack of clarity is a problem.
4. Can open source compliance issues impact valuation or deal structure?
Yes, although the impact is often indirect.
Open source issues rarely result in an immediate, dramatic reduction in valuation. Instead, they tend to affect how the deal is structured and how much risk the buyer is willing to take on.
For example, buyers may:
- Extend diligence timelines
- Require remediation before closing
- Introduce holdbacks or escrows
- Add more detailed representations and warranties
- Push for additional protections
In more serious cases—especially where core product functionality is affected—buyers may reassess the deal entirely.
The underlying issue is risk. If the buyer is uncertain about IP ownership or usage rights, they will protect themselves. That protection often comes at the seller’s expense.
5. How can I prepare my business for open source compliance before going to market?
Preparation starts with visibility.
You need to understand what open source components are in your product and what obligations come with them. That means conducting an internal review of your codebase and identifying:
- All open source dependencies
- The licenses associated with each
- How those components are being used
From there, you can assess whether you are in compliance with license requirements. If there are gaps, they can often be addressed—through documentation, process updates, or in some cases, code changes.
Equally important is establishing internal discipline. Buyers look for signs that the company has a process for managing open source, not just reacting to it.
The goal isn’t to eliminate open source—it’s to eliminate uncertainty.
When you go into a transaction with a clear understanding of your open source usage and compliance, the process moves faster, buyers gain confidence, and you maintain control over the narrative.