Will Open Source Close Your Exit?

For many private equity investors, the following scenario has begun to play out on a recurring basis: One of the investors portfolio companies is a potential acquisition candidate, with a term sheet negotiated and signed. The acquiror begins its due diligence with an inquiry into the origin of the company's technology, conducting interviews with the development team and running code-scanning tools to identify embedded copyright and license notices.

After a few days, the acquiror informs management of the erstwhile target, to its great surprise, that the company's developers made inappropriate use of "open source" software programs obtained over the Internet in developing the company's products.

The acquiror tells management that it has serious concerns about the impact of these problems on the proprietary nature of the company's code, and that there is already a significant decrease in the acquiror's perceived value of the company's technology. With due diligence review just begun, the negotiating leverage of the parties has quickly tilted away from the target.

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