Using Open-Source Software? What Startups Should Check Before Fundraising or an Acquisition

Preparing to raise investment or sell your business can be an exciting milestone, especially after months or years of hard work building your software.

You've spent time developing your product, working with developers and growing your business. Now, a potential investor or buyer wants to take a closer look at what you've built.

And that doesn't just mean the software you've created yourself.

Many technology businesses rely on open-source libraries, frameworks and other third-party code. While there's nothing inherently wrong with using open-source software, these components can come with licensing conditions that affect how they're used.

So, when an investor or buyer starts reviewing your intellectual property (IP), they may want to know exactly what your business uses, what rights it has and whether those licensing conditions have been met.

In this article, we'll explain what US startups should check before fundraising or an acquisition, and how to identify potential licensing issues before they become part of the deal.

Why Do Investors and Buyers Care About Open-Source Software?

Open-source software is widely used in technology businesses, so its presence in your product isn't necessarily going to concern an investor or buyer.

What they may want to establish is whether your business has the rights it needs to continue developing, using and commercialising its software.

For example, imagine your startup has developed a SaaS platform using a combination of proprietary code and open-source libraries.

Your business might own the original code created by its employees, but that doesn't mean it owns every component within the finished product. Some components may belong to third parties and be available under specific licence conditions.

Owning the code your business has developed doesn't automatically mean you own, or can use without conditions, every component within your software.

Importantly, open-source software can generally be used commercially. The question is whether your business is meeting the conditions of the particular licences involved.

An investor or buyer may want to understand whether those conditions affect how the product can be developed, distributed or sold, and whether any unresolved issues could create additional costs or complications.

This is one part of a broader IP due diligence review, which may also involve checking who owns the technology and whether relevant rights have been properly transferred to the business.

Do You Know What Open-Source Software Your Product Uses?

One challenge for growing technology businesses is that open-source components can accumulate over time.

A developer might introduce a library to improve your product's functionality. Another team member may use an existing framework to develop a new feature, while an external agency could incorporate additional software into the project.

Each decision might make sense at the time. However, years later, you may not have a complete picture of what's actually inside your product.

This is where an open-source software audit can help.

An audit generally involves identifying the open-source components your business uses, reviewing their licences and checking whether the business is complying with the relevant conditions.

Your technical team may use software analysis tools to identify dependencies, including components introduced indirectly through other libraries. They'll also need to consider how those components are actually being used, as this can affect which licence obligations apply.

One way to document this information is through a Software Bill of Materials (SBOM).

Think of an SBOM as an ingredient list for your software. It helps record the components that make up a product, including relevant information about their versions and dependencies.

The 2026 Minimum Elements for a Software Bill of Materials provides guidance on the information these records can contain.

An SBOM can make due diligence easier, but it doesn't automatically establish that your business has complied with every licence.

For that, you also need to understand what the licence requires, how your business has used the software and whether any obligations remain outstanding.

What Are You Promising About Your Software in an Investment or Sale Agreement?

When negotiating an investment or acquisition, you may be asked to make certain contractual statements about your business.

These are commonly called representations and warranties.

Put simply, they're statements about matters such as what your business owns, which rights it has and whether particular legal or contractual obligations have been met.

For a technology startup, these statements may cover IP ownership, third-party software licences and compliance with relevant licensing conditions.

Imagine you're preparing to sell your SaaS business.

The buyer asks you to confirm that your company has the rights needed to operate its software and has complied with applicable third-party licence obligations.

That might sound straightforward. But what if your developers incorporated open-source components several years ago and nobody has reviewed the relevant licences?

You don't want to make promises about your software without understanding whether they're accurate.

Depending on the transaction, the agreement may also include a disclosure schedule, which identifies particular information or exceptions relevant to the contractual statements being made.

For example, if you've identified an unresolved licensing issue, it may need to be disclosed and addressed through the transaction documents.

However, disclosing a problem doesn't necessarily fix an underlying licence breach. Its contractual effect will also depend on the wording of the agreement.

These details matter because inaccurate representations or breached warranties can lead to contractual claims or other consequences, depending on the agreement and circumstances.

The scope of these obligations will vary between fundraising transactions and acquisitions. Not every investment agreement contains the same level of IP warranties as a business sale.

That's why it's worth understanding exactly what you're being asked to confirm before signing.

What Do Open-Source Licences Actually Allow You To Do?

Not all open-source licences work in the same way.

Many permit businesses to use, modify and distribute software commercially, but they can impose different conditions.

Two broad categories worth understanding are permissive licences and copyleft licences.

Permissive Licences

Permissive licences, such as the MIT License and Apache License 2.0, generally allow businesses to incorporate open-source software into commercial products, including proprietary software.

However, they still contain obligations.

Depending on the licence and how the component is used, your business may need to retain copyright notices, include licence information or meet other conditions. Apache License 2.0 also contains express provisions relating to patent rights.

For many startups, these requirements are manageable, but they shouldn't be overlooked.

Copyleft Licences

Copyleft licences, such as the GNU General Public License (GPL) and GNU Affero General Public License (AGPL), can impose additional obligations in certain circumstances.

For example, distributing a program that incorporates GPL-covered code in a way that creates a covered combined work may require the relevant source code to be made available under the GPL.

However, simply using GPL-covered software internally doesn't automatically require a business to disclose its proprietary source code.

The AGPL introduces another consideration for some SaaS businesses.

Under AGPLv3, if a business modifies a covered program and allows users to interact with that modified version over a network, it may be required to offer the corresponding source code to those users.

What Does This Mean for a SaaS Startup?

Imagine your startup uses an open-source component to power an important feature of its SaaS platform.

Your developers have modified that component to suit the product, but nobody has checked whether the licence places conditions on how the modified software can be used or shared.

If the component is subject to AGPLv3, its licensing obligations may be relevant even though customers access your platform online rather than downloading the software.

That doesn't automatically mean your entire SaaS platform must become open source.

The answer depends on the specific licence, how the component has been incorporated into your product and what software falls within the relevant licensing requirements.

This is why understanding the difference between using software internally, making it available through a hosted service and distributing copies is important.

You can learn more about these distinctions in the GNU licensing FAQs.

What Happens When a Licensing Issue Is Discovered During Due Diligence?

Imagine your startup is progressing through an acquisition when the buyer's technical review identifies an open-source component with unclear licensing terms.

Perhaps the required copyright notices are missing, or the company has modified a component without understanding the source-code obligations that apply.

Does that mean the transaction is over?

Not necessarily.

The consequences will depend on the licence, how the software has been used, the nature of the issue and how important the affected component is to the product.

For example, a missing attribution notice may be relatively straightforward to correct, although the legal consequences of any past non-compliance still need to be considered.

A more substantial issue involving a key component of the company's software could require further investigation.

Depending on the circumstances, potential solutions might involve correcting notices, meeting outstanding licensing obligations, negotiating a separate commercial licence or replacing a problematic component.

These options won't always be available or straightforward. Some changes may involve significant development work, and a different licence generally requires the agreement of someone authorised to grant it.

Non-compliance can also have legal consequences beyond the transaction itself, including potential copyright infringement claims or termination of licensing rights under the relevant terms. Some licences provide opportunities to cure particular violations, so the applicable licence should be reviewed before deciding what action is required.

From a transaction perspective, the investor or buyer might request additional information, ask for an issue to be resolved or seek contractual protections before proceeding.

This doesn't mean every licensing issue will delay or prevent a deal. However, discovering a problem during due diligence can place additional pressure on a business that is already managing an important transaction.

Ideally, founders should investigate potential issues well before reaching this stage. That gives the business more time to understand its position and consider appropriate solutions.

What Should Founders Review Before Starting Due Diligence?

If you're preparing to raise investment or sell your business, a useful first step is speaking with your development team about the open-source components your product relies on.

Find out whether the business has an up-to-date software inventory, whether relevant licences have been identified and whether there are any components with unclear or potentially unmet obligations.

It's also worth checking what information external developers or agencies have provided about third-party code they've incorporated into your product.

Where potential issues are identified, investigate them and keep records of the steps taken to address them.

For more complex products, technical and legal input may be needed. Developers can help establish what software is being used and how it's integrated, while legal advice can help determine the licensing obligations and their potential implications for an investment or acquisition.

The aim isn't to remove open-source software from your product. It's to understand the rights your business relies on and be prepared to explain them when questions arise.

When Should You Get Legal Advice?

Open-source software can be an important part of building and growing a technology business. However, if you're preparing to raise investment or sell your company, it's worth making sure the licences supporting your product have been properly reviewed.

Legal advice may be particularly useful if you're unsure about particular licensing conditions, have identified a potential compliance issue or need to understand the IP representations and warranties you're being asked to make during a transaction.

Addressing these questions early can help you understand your legal position and consider any necessary steps before they become part of an investor's or buyer's due diligence process.

If you're preparing for fundraising or an acquisition and need assistance reviewing your intellectual property arrangements, you can reach us at (888) 449-8437 or team@sprintlaw.com for a free, no-obligations chat.