Software Licensing Basics

When you pay for software, it is easy to assume you own it.

After all, your business has paid for the subscription, commissioned the development or purchased the product. Surely that means it is yours?

Usually, it doesn’t.

In most cases, what you have actually acquired is a licence — permission to use someone else’s intellectual property on particular terms.

For many businesses, that distinction does not seem particularly important while everything is working well. It becomes much more important when you want to change providers, modify the software, sell your business, bring in another developer or simply retrieve your data.

Understanding the basics of software licensing can help you identify those issues before they become business continuity problems.

What is a software licence?

Software is generally protected by copyright. The person or company that owns that copyright controls important rights relating to the software, including how it can be copied, adapted and distributed.

A software licence gives somebody else permission to exercise particular rights without transferring ownership of the underlying intellectual property.

The important distinction is:

Ownership gives you the IP. A licence gives you permission to use it.

And that permission can be broad or narrow.

A licence might restrict:

• who can use the software;
• how many users can access it;
• where or how it can be used;
• whether it can be modified;
• whether third parties can access it;
• whether the licence can be transferred;
• how long the licence lasts; and
• what happens when the agreement ends.

That is why the detail matters.

SaaS: the software most businesses now use

Software as a Service — or SaaS — is probably the licensing model most businesses encounter every day.

Think about your accounting platform, CRM, project management system, email marketing platform or e-commerce software.

Rather than purchasing a copy of the software outright, you generally pay a recurring fee for access to a platform operated by somebody else.

That arrangement can be extremely convenient. The provider usually manages hosting, updates and maintenance.

But it also means your business is dependent upon continued access to somebody else's system.

Before adopting a business-critical SaaS platform, consider questions such as:

• What happens if we stop paying?
• Can the provider suspend our account?
• What happens if the provider terminates the agreement?
• Can we export our data?
• In what format will we receive it?
• How long is our data retained after termination?
• Can prices or other terms be changed?
• What happens if the provider shuts down the service?

For software sitting at the heart of your operations, these are not simply IT questions. They are business continuity questions.

What about software you pay someone to build?

This is where one of the most common misunderstandings arises.

A business engages a developer or agency to build a website, app, platform or bespoke piece of software.

The business pays a substantial amount for the work.

It therefore assumes:

We paid for it, so we own it.

That assumption can be dangerous.

Paying someone to create intellectual property does not necessarily mean that ownership of the resulting IP automatically transfers to you.

The contract with the developer needs to be reviewed carefully to determine what the business actually receives.

Depending on the arrangement, the developer may retain ownership of some or all of the underlying intellectual property and give the business a licence to use it.

Sometimes that is perfectly appropriate.

For example, a developer may use its own pre-existing code, libraries, frameworks or tools across multiple client projects. It may not be commercially realistic for one client to own all of that underlying technology.

The real question is whether your business has the rights it needs.

Ownership isn't always the only answer

It can be tempting to say that a business commissioning custom software should always insist on owning everything.

In practice, the position is usually more nuanced.

Ownership may be appropriate where the software itself is a valuable proprietary asset of the business.

But in other circumstances, a sufficiently broad licence may achieve what the business actually needs.

For example, you might need a licence that is:

• perpetual;
• irrevocable;
• worldwide;
• transferable;
• capable of being sublicensed;
• broad enough to allow modification; and
• able to continue if the relationship with the original developer ends.

The appropriate structure depends on the commercial purpose of the software.

The important thing is that this is considered before a dispute arises.

Open source doesn't mean "free of conditions"

Another area businesses need to understand is open source software.

Open source code can be extraordinarily useful and is embedded throughout modern software development.

But "open source" does not mean "there are no intellectual property rights".

Open source software is still licensed.

Different open source licences impose different conditions. Some are relatively permissive. Others can impose obligations concerning attribution, distribution of source code or the licensing of derivative works.

This becomes particularly important where a business is developing proprietary software that it intends to commercialise.

Your developers should understand what third-party code has been incorporated into the product and the licences applying to it.

If your business is acquiring a technology company or software product, this can also be an important part of IP due diligence.

Don't forget about your data

There is another issue that is technically separate from software ownership but often matters even more in practice:

your data.

Imagine your business has used a platform for five years.

It contains your customer information, transaction history, records and operational data.

You decide to change providers.

Can you actually get that information out?

And, just as importantly, can you get it out in a format that another system can use?

A contractual right saying that "you own your data" may not be particularly helpful if the practical process for retrieving it is difficult, expensive or incomplete.

For business-critical platforms, consider both legal ownership and practical portability.

What happens if you sell the business?

Software licences can also create unexpected issues during a business sale.

A buyer will usually expect the systems necessary to operate the business to continue after completion.

But some software licences cannot simply be transferred to a purchaser.

Custom software arrangements can create even greater problems if nobody has previously established exactly what intellectual property the business owns.

This is one reason IP ownership and licensing should be addressed well before a sale process begins.

A buyer conducting due diligence is likely to want to understand whether the business actually has the rights required to continue operating its technology.

Finding out during due diligence that an important piece of software is owned by a former developer is rarely ideal.

Five questions every business should ask

You do not necessarily need to review every software subscription your business has ever signed up for.

Start with the systems your business could not comfortably operate without.

For each one, ask:

1. Who owns the software?
2. What exactly are we licensed to do with it?
3. What happens if the agreement ends?
4. Can we retrieve and migrate our data?
5. Could we continue operating if this provider or developer disappeared tomorrow?

That last question is particularly useful.

It shifts the conversation away from legal terminology and towards the commercial issue that really matters: how dependent is the business on something it does not control?

The practical takeaway

Software licensing is ultimately about understanding the difference between access and control.

Your business may have used a system for years. You may have spent hundreds of thousands of dollars developing it. Your entire team may depend on it.

None of those things necessarily tells you what legal rights you have.

For important software assets and systems, make sure you understand:

• who owns the underlying IP;
• what your licence allows you to do;
• what rights you have if the relationship ends;
• whether you can access and migrate your data; and
• whether the arrangement will still work if your business grows, restructures or is sold.

A little clarity at the beginning of a software relationship can prevent a much more difficult conversation later.

If you're not sure what intellectual property your business owns — including software, brands, content and other assets — you can also use my free IP Risk and Ownership Audit at www.elisesteegstra.com/ip-audit to identify areas that may need a closer look.

Disclaimer: This article is intended for general educational purposes only and does not constitute legal advice. You should obtain advice tailored to your circumstances before acting on any information discussed in this article.