Being well-prepared can accelerate deal negotiations, reduce post-merger risks, and even enhance your company’s valuation. Whether you’re actively seeking acquisition or want to be prepared for future opportunities, this guide will help you strategically optimize your SaaS ecosystem, ensuring a smooth transition while positioning your company as an acquisition-ready, scalable business.

Why acquirers analyze your tool stack

1. Cost & operational efficiency

Buyers look for redundant, underutilized, or costly tools that can be consolidated. Overlapping SaaS solutions signal inefficiencies, potentially lowering valuation.

2. Scalability & growth readiness

Acquirers assess whether your SaaS stack can support future expansion or if costly upgrades will be required post-merger. Tools that integrate well with modern tech stacks are more attractive.

3. Security & compliance risks

GDPR, SOC2, ISO 27001, and HIPAA compliance are critical factors in the M&A process. Shadow IT, vendor security gaps, or inconsistent data policies can delay deals or increase risk.

4. Integration complexity

Buyers evaluate how easily your systems can merge with their existing infrastructure. Complex transitions, data migration risks, and required training may impact post-merger timelines.

How to prepare your tool stack for M&A

Many of these steps overlap with the SaaS Tool Consolidation Checklist for M&A, which acquirers use. Being proactive ensures a smoother transition and positions you as an acquisition-ready company.

1⃣ Inventory All SaaS Tools: List all business-critical software, identify redundancies, and document ownership.

2⃣ Compile Vendor Contracts: Review licensing terms, renewal dates, and cost structures. Flag high-cost commitments.

3⃣ Ensure Security & Compliance: Maintain certifications, audit vendor security policies, and address potential risks.

4⃣ Plan for Integration: Identify compatibility with the buyer’s tech stack and potential roadblocks. Map out a transition strategy.

Final thoughts: tool transparency as a competitive advantage

A well-prepared, transparent tech stack overview doesn’t just reduce M&A friction-it positions your company as a mature, acquisition-ready business.

Companies that proactively optimize their SaaS ecosystem gain:

• Faster negotiations with acquirers due to a clear tech landscape.
• Stronger valuation by demonstrating efficiency and scalability.
• Smoother post-merger integration, reducing disruptions.

By taking a strategic approach to SaaS tool optimization, you can increase your company’s attractiveness, streamline the due diligence process, and ultimately enhance the likelihood of a successful, high-value exit.

The post Preparing your SaaS tool stack for M&A: a seller’s due diligence guide appeared first on saas.group.

Here are 10 key strategies to help build a high-impact buyer list that achieves optimal outcomes.

1. Segment Buyers into Tiers

The first step in building an effective buyer list is segmentation. Potential buyers should be categorized into three tiers based on their likelihood of engaging and their strategic fit with the target company:

• Core Buyers: These are the most promising buyers, often direct competitors or companies with a strong strategic alignment. They are highly likely to pursue the opportunity, as the acquisition complements their existing operations or growth strategy.
• Opportunistic Buyers: These buyers may operate in related industries or have demonstrated interest in expanding into the target’s sector. While less obvious than core buyers, they may have strong motivations tied to diversification or market entry.
• Exploratory Buyers: This group includes companies that are tangentially related to the target’s market or new entrants exploring growth opportunities.

Segmenting buyers ensures a structured approach and allows sellers and advisors to prioritize resources where they are most likely to yield results. This framework is particularly valuable in highly specialized sectors, such as SaaS or e-commerce.

2. Balance Strategic and Financial Buyers

One common question in M&A is whether to focus solely on strategic buyers or to include financial buyers as well. Strategic buyers, such as direct competitors, often bring synergies that enable them to justify higher valuations. However, financial buyers, such as private equity firms and family offices, are invaluable for maintaining deal momentum and creating competitive pressure.

Why Include Financial Buyers?

• Financial buyers are seasoned professionals who understand how complex M&A processes are. Their ability to navigate legal, financial, and operational details often accelerates deal timelines.
• Even if their valuation may be lower due to the lack of synergies, their participation can create a sense of urgency for strategic buyers, leading to better overall outcomes.

3. Broaden the Pool While Maintaining Confidentiality

A broader buyer pool increases the chances of finding the perfect acquirer. However, maintaining confidentiality is critical, particularly when dealing with sensitive information. Advisors (or sellers themselves) must strike a balance between reaching a wide audience and protecting the integrity of the deal.

Expanding the pool can be particularly effective in situations where the most obvious buyers may not offer the best terms. For example, a logistics company looking to sell may find value in engaging with buyers in adjacent industries, such as tech-enabled supply chain platforms. Boopos has found success in exploring unconventional buyer pools for tech companies, uncovering opportunities that competitors may overlook.

4. Prioritize Competitors

Direct competitors often top the list of potential buyers. They are intimately familiar with the market and may see significant value in acquiring the target to expand their market share, reduce competition, or achieve operational efficiencies.

When approaching competitors, it’s crucial to highlight synergies that align with their strategic goals. For example, a competitor may benefit from the seller’s proprietary technology, established customer base, or geographic presence. These factors can drive valuations higher while ensuring alignment between the two entities.

5. Identify Hybrid Buyers

Hybrid buyers, also known as quasi-strategic sponsors, are financial buyers with existing investments in related sectors. These entities combine the financial rigor of private equity firms with the operational insights of strategic acquirers.

For example, a private equity firm with a portfolio company in the healthcare tech sector may be highly motivated to acquire complementary businesses. This dual perspective often allows hybrid buyers to offer competitive valuations while maintaining process discipline.

6. Conduct Rigorous Screening

Not all potential buyers are viable, and conducting rigorous prescreening is essential. Key factors to evaluate include:

• Financial Capacity: Does the buyer have the resources to close the deal? For financial buyers, this may involve reviewing the size of their funds or recent fundraising activities.
• Acquisition History: Have they completed similar deals? A history of successful acquisitions can indicate a higher likelihood of closing.
• Sector Fit: Is the buyer genuinely interested in the target’s industry? Companies with strategic alignment are more likely to engage and offer favorable terms.

This level of due diligence ensures that only serious, capable buyers make it to the negotiation table.

7. Highlight Integration Opportunities

Buyers often seek acquisitions that provide clear integration benefits, whether vertical or horizontal:

• Vertical Integration: Buyers looking to strengthen their supply chain or gain control over critical inputs. For instance, a software provider acquiring a data center to optimize costs and improve service delivery.
• Horizontal Integration: Buyers aiming to expand their product offerings or geographic reach. An example might be a SaaS company acquiring another SaaS provider to cross-sell complementary products.

Understanding and articulating these synergies can significantly enhance buyer interest and valuations.

8. Leverage Niche Specialists

Specialist buyers, such as private equity firms focused on a specific industry, bring deep expertise that generalists often lack. These buyers are more likely to see the long-term value of the target and may offer higher valuations as a result.

For example, a private equity firm specializing in renewable energy would be an ideal buyer for a clean-tech company. Their understanding of regulatory frameworks, market trends, and operational challenges positions them to extract maximum value from the acquisition.

9. Tap into International Markets

Cross-border M&A is on the rise, and quite common already in the tech industry. These buyers may seek to enter new markets, acquire innovative technologies, or diversify their portfolios.

Engaging international buyers requires a nuanced approach, including partnerships with local intermediaries and cultural sensitivity during negotiations. Boutique firms like Boopos leverage their networks and expertise to connect clients with international acquirers, ensuring a seamless process.

10. Iterate and Refine the Buyer List

The buyer list is a living document that evolves as new opportunities and market dynamics emerge. Regular updates and feedback loops are essential to ensure relevance.

For example, feedback from early conversations with buyers can help refine the pitch or identify previously overlooked prospects. This iterative approach ensures that the list remains aligned with the seller’s goals and market conditions.

Building a Buyer List That Delivers Results

Creating a high-impact buyer list requires strategy, diligence, and adaptability. By incorporating the above strategies, advisors can maximize value, enhance deal certainty, and deliver exceptional outcomes for their clients.

For M&A firms, this process is central to their mission of supporting tech companies in navigating complex transactions. If you want to learn more about the sell-side process:

• How to sell your SaaS business in 2025. 
• How the sell-side M&A process works

The post 10 Key Strategies for Building a High-Impact Buyer List in M&A appeared first on saas.group.

But there are several focus points that are specific to M&A transactions involving SaaS target companies that shall be highlighted in the following (under German law):

SaaS Specific Legal DD Focus Items

There are four items that are a specific focus of legal due diligence regarding SaaS companies:

1. Customer contracts and standardization,
2. Exclusive ownership in source code,
3. Freelancers and
4. Data protection.

Let’s deep dive into those four focus items.

1. Customer contracts and standardization

The value drivers in SaaS transactions are recurring revenue and profitability and both result from customer contracts. Usually, SaaS companies work with quotations and purchase orders and apply the general terms and conditions of the SaaS company. If all customer contracts are concluded, applying the SaaS company’s general terms and conditions, the due diligence of the customer contracts is easy: only customer-specific terms like prices, fixed term and renewal terms, or customer-specific customizations need to be specifically reviewed.

The less customer contracts are standardized, the more cumbersome the due diligence becomes. For example, if a SaaS company has mainly large corporation customers and they insist on using their general framework agreement with statements of work and service level agreements, each customer agreement has to be reviewed individually, which takes longer and leads to a more complex risk assessment. Therefore, standardizing customer agreements using the SaaS company’s general terms and conditions facilitates the due diligence review and a straightforward M&A transaction process.

2. Exclusive ownership of source code

Except for IP, SaaS companies usually don’t have any valuable assets. But the IP is an extremely important asset. The key factor for IP is that it’s actually owned by the SaaS company and that such ownership is exclusive.

Basically, there are three sources who usually contribute to software source code (i) the founders / managing directors, (ii) employees, and (iii) freelancers / outsourced service providers.

Under German law, the rights in software created by employees automatically transfer to their employer regardless of whether there is a rights transfer clause or not, Sec. 69b of the German Copyright Act.

But this provision does not apply to managing directors and freelancers or outsourced service providers. Therefore, the rights in software source code created by them only transfer to the SaaS company if this is agreed upon. Therefore, it is paramount for SaaS companies to include valid and extensive rights transfer clauses in their contracts with managing directors, freelancers, and service providers.

3. Freelancers

SaaS companies often work extensively with freelancers. They are used for different functions, quite often for software development and DevOps, but also for service, sales, or other functions.

The main legal and tax risk in working with freelancers is whether or not they are actually employees. This differs from jurisdiction to jurisdiction. In Germany, the German State Pension Fund (Rentenversicherung Bund) has set up a catalog of criteria that are determinative for deciding whether a freelancer is an actual freelancer. What’s decisive is not primarily what is written in the freelancer contract, but the actual situation.

The consequences of fake freelancers being actually employees are far-reaching: Firstly, employees are entitled to termination protection under German law according to the German Termination Protection Act and freelancers are not.

Secondly, the tax regime is different for employees and freelancers. Freelancers charge VAT (unless a VAT exemption applies), pay their own taxes, and are not subject to social security. Employees are paid a salary, the employer has to withhold wage tax and employees are subject to social security, i.e. the employer and the employee each pay their part of the contribution to the health insurance, unemployment insurance, and pension insurance.

In case a freelancer was actually an employee, taxes and social security have to be retroactively paid and late payment charges apply.

Therefore, the legal due diligence on SaaS companies usually focuses on the status and treatment of freelancers and the SPA almost always contains tax and social security indemnity provisions, by which the seller(s) have to economically bear tax and social security payments incurring until the closing date of the transaction.

4. Data Protection

The level of detail of a data protection compliance review in the course of due diligence varies depending on the intensity of the processing of personal data by the SaaS company. In easy cases, SaaS companies do not process personal data beyond standard processing steps such as names of contact persons at customers or suppliers in a CRM or employee data.

But there are other cases where the SaaS company not only provides software, by which customers themselves process personal data but where the SaaS company has access to and processes personal data of its customers as well.

While standard data protection compliance due diligence is limited to certain areas such as whether an internal or external data protection officer has been appointed, whether there is a directory of data processing measures, which technical and operational measures are applied to protect personal data or whether there have been data protection violations and/or investigations by public authorities.

But if the business model of a SaaS company involves more extensive processing of personal data, the data protection compliance due diligence requires more detail and will usually comprise a review of the business model, the type of personal data processed, consent mechanisms, external reviews of data protection compliance, etc.

SaaS Specific SPA Focus Items

In SaaS M&A transactions, clauses in the SPA that are specific to SaaS transactions vary from transaction to transaction. However, the SaaS-specific clauses most often seen are

1. ARR or MRR based earn-out clauses,

2. Consideration of virtual shares in the purchase price and

3. SaaS-specific warranties and indemnities.

1. ARR or MRR-based earn-out clauses

Sometimes buyer and seller agree only on a fixed purchase price. But in many transactions, next to a fixed purchase price, a variable purchase price (so-called “earn-out”) is agreed upon.

Whereas earn-outs are most often profit (EBIT or EBITDA) based in M&A transactions, in SaaS transactions they are often (but not always) based on annual recurring revenue (ARR) or monthly recurring revenue (MRR).

This is because the cost structure at SaaS companies often changes after an acquisition. For example, synergies may be generated, costs may rise or fall due to an increase or decrease of development work or overhead functions may be centralized.

ARR or MRR-based earn-out clauses are relatively straightforward, but “recurring” revenue must be accurately defined. Usually, it includes only recurring licensing, service, and maintenance revenue from software licensing, service, and subscription agreements, but excludes one-time revenues generated through e.g. set-up and installation or development. Furthermore, revenues from non-collectible invoices are usually excluded.

2. Consideration of virtual shares

Quite often, SaaS companies grant virtual shares to their employees and members of management and sometimes further persons (e.g. advisors or advisory board members). Payments on such virtual shares are usually owed by the SaaS company upon the closing of the transaction. If the virtual shares are granted to employees, payments on such virtual shares are subject to wage tax withholding and potentially social security contributions.

The way often followed to deal with virtual shares is to deduct the amount payable (including wage tax to be withheld) and potential social security contributions as financial debt in the equity value purchase price calculation, leading to an iteration calculation. Other ways of settling virtual share programs are possible and the ideal way depends on how the virtual share program is structured.

SaaS-specific warranties and indemnities

The warranties and indemnities specific to SaaS transactions usually mirror the focus items in the due diligence. Most SaaS SPAs contain extensive warranties on IP ownership, exclusive rights in the source code, the absence of open source code leading to copyleft effects or source code disclosure obligations, source code escrow arrangements, IT security, and data protection compliance.

Furthermore, a tax indemnity provision in a SaaS SPA will usually comprise indemnification not only for taxes payable but also social security contributions payable by the company. At least regarding wage tax and social security contributions, such indemnification obligation must comprise the entire period until the closing of the transaction, even if the economic effective date differs from such date.

Summary

M&A involving SaaS companies is no rocket science. But in order to facilitate a smooth M&A process, founders of SaaS companies should envisage the due diligence already from day one of their company and standardize their customer agreements, implement proper rights transfer clauses in the managing director service agreements and freelancer agreements, and work with external freelancers only on such basis that they are actually freelancers and not employees.

Also, proper documentation should be kept available on a constant basis in order to avoid a lengthy process to prepare due diligence when an M&A transaction actually materializes.

The post Legal Focus Areas in SaaS M&A Transactions appeared first on saas.group.

However, the story takes a twist when we shift our focus to companies with open-source products. In such cases, a significant portion, if not all, of the company’s code is available to the public. Teams may choose open-source development as it offers plenty of great advantages. However, inevitably this approach to development gives rise to various questions, too, such as: ‘Does open source mean that anyone can freely use the code and emerge as a market rival?’ Both investors and vendors are not only concerned about safeguarding the IP but also about formulating effective monetization strategies in the open landscape. How do you derive revenue when your core product is freely available to all? It’s a scenario that presents its own set of unique challenges and potential opportunities.

One such challenge is the question of how to carry out tech due diligence (Tech DD) in these companies. A detailed and thorough deep dive with a different perspective is required to ensure that the open-source software adheres to standard coding practices, is secure, actively leverages community efforts and engagement, and has no licensing issues. In other words: does the product harness the advantages, but does it stick to its obligations at the same time?

As we will discover, there are scenarios where embracing open source can actually lead to greater opportunities, as demonstrated by industry titans like Red Hat, WordPress, and MongoDB. Even more intriguing is the fact that large enterprises are now using open-source software to collect invaluable data and insights about their products and services.

In this article, we will highlight the advantages, strategies for monetization, challenges, and Tech DD considerations that should be carefully navigated when considering open-source software in tech investments.

Advantages of Open Source

Community Collaboration

Open-source projects thrive on the power of community collaboration. A diverse group of developers, enthusiasts, and experts work together to enhance the software, find and fix bugs, and drive innovation.

Open-source is a unique world where competitors can also be collaborators. Both individual contributors and participants from various companies come together to improve and expand the capabilities of open-source projects. Each participant, whether a corporation or an individual, contributes to the project for their own reasons. Some companies go the extra mile, allocating dedicated teams to open-source projects full-time to ensure seamless compatibility with their hardware or software. For instance, Microsoft (The same company that compared Linux to cancer back in 2001) began contributing to the Linux kernel in 2009 to develop essential drivers required for Microsoft’s Hyper-V virtualization technology, and later to enhance the Linux experience on its Azure cloud platform, or in 2016, Samsung provided ARM support to .NET Core and contributed to Xamarin, enabling it on a variety of Tizen devices, enthusiastically stating to be “excited to be part of the .NET community”.

Individual contributors may have a range of motivations as well: from learning and self-improvement, enhancing their reputation in the community, or simply the belief in creating open software that anyone can use and improve.

This broad collective effort often results in a product that’s not only robust but continually evolving. This diversity of thought and effort often leads to creative solutions that might not have been possible in a closed, proprietary environment.

Faster Development

Open source projects often have faster development cycles as contributors worldwide work together to improve the codebase. This agility can be a competitive advantage in the technology industry.

The distributed nature of open-source development means that innovation happens at an accelerated pace. Bugs get identified and fixed more rapidly, and new features are developed with the collective wisdom of a global developer community.

Low Entry Barrier for Potential Clients

Offering a free version of the software serves as a powerful marketing tool. It allows potential clients to try the software with minimal risk, enticing them to explore commercial services later.

This eliminates the need for expensive licensing fees or long-term commitments and can be incredibly attractive to startups and small businesses, which are often more budget-conscious than enterprises. Once they’ve experienced the value of the open-source version, many companies find it logical to invest in more advanced commercial offerings as extensions to the open-source version, such as SLAs, additional functionality for scalability, or consulting services.

Increased Security and Transparency

Transparency is a cornerstone of open source and contributes to building invaluable trust with customers. Anyone can inspect the code, which boosts their confidence in the absence of hidden vulnerabilities or malicious code, and verifies that the software meets their security and compliance requirements. Tech DD should include a thorough review of the project’s security practices, vulnerability management, and compliance with industry standards and regulations.

Open-source software is known for its security benefits. When vulnerabilities are discovered, there is an army of developers and security experts ready to address the issue. This rapid response can be a major advantage in today’s fast-paced and ever-changing threat landscape.

Flexibility in Customization

Open-source software is highly customizable, allowing businesses to tailor it to their specific needs. This flexibility broadens the user base and increases adoption over time.

Unlike proprietary software, open-source software provides customers with the freedom to modify the code to suit their unique requirements. This leads to increased adoption and can even foster entirely new businesses built around customizing and supporting open-source solutions.

Monetization Strategies

Below are some commonly utilized monetization strategies for companies with open-source products:

Paid Support

Offering commercial support services, such as consulting and premium customer support, can be a lucrative revenue stream.

Many companies using open-source software require support. They need assistance with installation, configuration, troubleshooting, and scaling. This creates a demand for commercial support services, which can be offered as a premium service.

Customization services, where open-source software is tailored to meet the unique requirements of specific businesses, can also be a lucrative niche. Such customizations are often complex and require ongoing support, creating long-term partnerships and revenue opportunities.

A notable example of this strategy is Red Hat. While CentOS and Fedora Linux are free and open-source, they serve as the upstream, community distro of Red Hat Enterprise Linux (RHEL). Red Hat provides paid support for its enterprise Linux distribution, offering 10-year life cycle support,  targeted at businesses requiring guaranteed support, stability, and security.

Enterprise Version (Open Core)

Developing an enterprise version of the open-source software with premium features including proprietary plugins or extensions that enhance the core product (also known as the “freemium” model) is a common monetization strategy. Businesses are often willing to pay for these add-ons, especially if they streamline their operations or provide essential functionality. 

GitLab uses this strategy to monetize its product. The GitLab Community Edition is open-source and freely available under the MIT license. However, GitLab Inc., provides an enterprise version called GitLab Enterprise Edition which offers additional features like advanced CI/CD capabilities, code quality reports, and security tools.

Hosting/Cloud Version (OpenSaaS)

Providing a cloud-based version of the software can generate recurring revenue through subscription models.

Cloud-based versions of open-source software provide convenience for users who don’t want to manage the software infrastructure themselves. A subscription-based model can generate steady, recurring revenue.

Automattic, the company behind WordPress, offers WordPress.com as a hosted version. While WordPress is a well-known open-source content management system, WordPress.com provides a managed platform with additional features, themes, and plugins compared to the self-hosted version and allows users to choose free or paid plans based on their requirements.

Training & Certification

Professionals seek accreditation and expertise in open-source technologies. Providing educational resources like training sessions and workshops can play a pivotal role in empowering users to better comprehend and make effective use of the product. This will also ensure the formation of an actively engaged professional community around the product. This, in turn, can result in a wider adoption and increased success. One successful example of this strategy is the Linux Foundation.

Dual Licensing

Employing a dual licensing model is a common approach to support free software business models in a commercial environment. In this model, companies distribute the same software under two different license forms: a traditional proprietary license and an open source one, often from the GPL (GNU General Public License) family. 

The company then profits by selling proprietary licenses to commercial operations looking to incorporate the software into their own business, providing flexibility for customers with distinct needs. One well-known example of dual licensing is Oracle’s MySQL database management system. 

Challenges and Caveats During Tech DD

When it comes to Tech DD on open-source products, there are specific areas that require special attention. While some practices are common across both open-source and proprietary code products, the focus and approach differ. Below are some key areas that are carefully assessed during the Tech DD process on open-source products to ensure a thorough evaluation and risk mitigation:

Community Management

Managing an open-source community presents a unique challenge for companies that offer open-source products. Unlike teams working in isolation, community management is a crucial aspect of an open source-driven company and is a continuous effort that can be quite demanding. This process involves aligning company goals with community interests and contributions, presenting the product at conferences, and attracting open-source developers. 

In the Tech DD process, we thoroughly examine strategies for managing community-driven enhancements to ensure the open-source nature attracts users and builds a collaborative environment. Below are some common challenges that we typically observe in such companies

• Active engagement with the community: When issues reported by the community remain unresolved for an extended period without any feedback, or when pending pull requests from the community stay idle with no comments or feedback, it is evident that the company is not actively incorporating the community’s considerations, thereby failing to leverage the unique advantages of being open source. 
• Incorporating community feedback in roadmap planning: Aligning and prioritizing features becomes more challenging when there are diverse stakeholders from community to business, with varying and sometimes conflicting requests. We examine the company’s processes for handling divergent viewpoints in feature planning or strategic decisions, including product discovery and prioritization frameworks in use. This is to ensure that all stakeholders’ perspectives are taken into account and that incoming product requests are given due consideration. The absence of a balance between community requests and other stakeholders (such as enterprise users or the internal marketing team) can be a concerning sign during Tech DD.

In order to mitigate the above risks, companies should utilize practices that ensure:

• Reported issues from the community are resolved in a timely manner or contain constructive feedback with statuses such as: “requires more details”, “being worked on”, “planned”, “duplicate”, etc.
• No abandoned pull request without feedback exists.
• Clearly defined guidelines for collaboration and templates on how to request features or report bugs exist. These guidelines should be communicated to the community in a clear and accessible manner, ensuring that everyone understands how to contribute effectively.

A typical approach to tackle the above challenges is to define a “Community Manager” role. This role takes on various traditional software and product development responsibilities for an open-source community, ensuring that everything runs smoothly. Primary responsibilities of this role include moderating, engaging, and supporting external contributors as well as coordinating with other departments—such as product, engineering, and content marketing—to support community initiatives. The presence of a “Community Manager” role is a positive indicator that the company takes community management seriously. 

Resource Dependency

Assessing the level of reliance on specific resources or expertise that may affect the company’s ability to monetize effectively. This includes evaluating the availability and sustainability of internal staff and external contributors and consultants. Understanding the dependency on these resources helps determine the potential challenges and risks associated with maintaining the product. We measure the impact of all internal and external contributions to the code to ensure that no one entity pushes the product in a specific direction without considering company and community goals. These evaluations are crucial in assuring a robust and healthy community engagement.

One such metric to identify the key contributors and gauge a project’s resilience to this risk of losing crucial knowledge is known as the “Bus Factor”. At TechMiners, we utilize our proprietary algorithm during the Tech DD process to pinpoint key contributors to the code. This aids us in assessing the risk of knowledge loss and ensuring the project’s continuity even in the event of unexpected changes and losing vital contributors.

A potential red flag in this scenario would be the identification of core parts of the product being heavily dependent on a single person (i.e. a bus factor of 1). The risk becomes even more significant if that person is an external contributor, as there is no legal obligation for them to continue working on the product or share their knowledge. They can essentially cease contributing to the code at any time. 

Key knowledge should not be centralized with a single individual, and to mitigate this risk, companies should actively work towards spreading the knowledge of the code, particularly regarding the core parts of the product, within their internal development teams. This can be achieved through proactive documentation, knowledge-sharing sessions, and conducting regular training and workshops.

Quality Assurance

To build a reputable open-source project and attract third-party contributors, it is crucial to implement robust quality assurance processes. As the company and its product gain traction and community contributions increase, effective steering mechanisms become essential to maintain high quality.

During Tech DD, we investigate the company’s strategies for managing and incorporating community-driven enhancements into the product. Our goal is to ensure that the open-source nature not only attracts users but also builds a collaborative environment that ultimately enhances the overall quality of the product. Below are some key areas we assess to ensure the maintenance of high-quality standards in this dynamic collaborative environment:

• Effective quality management of external contributions: We check for clear guidelines on how to contribute to code externally (e.g. defined requirements for creating a pull request). We look for well-defined roles and responsibilities for reviewing external code and providing constructive feedback to guide community collaboration. The role of a “Community manager” becomes significant in facilitating communication between internal teams and external contributors. This continuous engagement enables a robust feedback channel to the community on how they can improve the quality of their contributions.
• Overall quality, readability, and organization of the code base: Furthermore, we recommend archiving or deleting inactive repositories to maintain a clean code base and minimize unnecessary clutter.
• Well-defined quality gates: We look for the implementation of mandatory code formatting, linting, and code analysis tools in the development pipeline. These tools serve as checkpoints to prevent low-quality code from being pushed to the source.
• Extensive test coverage: Having a high level of test coverage, accompanied by automated constraints defined in the development pipeline.

The above practices become particularly crucial in open source products, where managing a diverse range of contributions from developers over whom the company has no control over their coding practices requires careful supervision to uphold code quality in the long run. We want to make sure that what sounds like a great opportunity for high efficiency doesn’t actually end up creating a chaotic mess on its way to a standstill.

Documentation 

The importance of documentation differs significantly between open-source and proprietary products. Open-source products particularly rely on high-quality and up-to-date documentation to attract external contributors and engage the community effectively. It is crucial to have comprehensive documentation readily accessible to absorb these contributors and maintain their interest. Furthermore, transparently outlining the product’s future evolution through clear documentation also plays a vital role in gaining the community’s trust. Therefore, it is essential to provide an accessible roadmap that allows everyone to see the product’s planned direction. 

In the Tech DD process, a concerning observation would be to see outdated documentation or lack of clear ownership for documentation in teams. In order to mitigate the risks, companies should define clear owners for documentation and always have up-to-date documentation available to the community. To mitigate risks, companies should assign clear owners for documentation and consistently maintain up-to-date documentation accessible to the community. Without these measures, the open-source community may not find sufficient motivation (or knowledge) to engage.

Code Architecture and Customization

During the Tech DD process, we delve deep into the code architecture and applied design patterns to ensure that the software is flexible enough to be easily customized and tailored to meet the specific needs of users, without limiting others from doing the same. We analyze topics such as:

• What parts of the code are customizable without requiring to modify the core components, and to what extent?
• Does the product offer a flexible plug-in mechanism, without requiring in-code configurations that allow easy and independent functionality added to the product without modifying the core parts?
• How do the product and tech teams decide which part of the product should be flexible and extensible for customization?

The software’s ability to offer a high level of customization allows it to adapt to the diverse needs of users across different industries and domains. This not only expands the product’s reach but also creates opportunities for growth in new areas. On the other hand, if the software requires major modifications to its core to support common additional functionalities, it can be a major obstacle to future growth. To prevent such issues, during the product discovery phase, companies should prioritize identifying the essential components that users are likely to customize and plan ahead to ensure maximum flexibility for customization in those parts.

Security and Vulnerability Management

It’s important to note that a high level of security on open-source products cannot be taken for granted. Greater transparency could give potential attackers a chance to find weak spots. To help avoid this, we focus heavily on the availability and proper configuration of automated scans as part of CI/CD (e.g. Trivy, dependabot) in our Tech DD process. This will enable the company to identify any possible weaknesses and security threats early and continuously, thereby validating the product’s strength and ensuring its security.

Licensing, Legal Compliance, and IP protection

While licensing is commonly associated with the legal domain, it plays a significant role in a Tech DD as well. To achieve compliance with legal requirements, the following practices are implemented during the Tech DD process:

• Conducting a comprehensive analysis of the third-party open-source licenses utilized by the product.
• Evaluating the company’s adherence to the chosen licenses and assessing its compliance.
• Examining the compatibility of various open source licenses with each other, as well as with any proprietary software involved.
• Assessing the company’s awareness of licensing compatibility, e.g. black/white listing of third-party licenses similar to what Google has. 
• Checking CI/CD pipeline to verify that automated licensing checks of third-party libraries exists 

In addition to assessing standard third-party licensing compliance in code (which is also applicable to products with proprietary code), examining whether the company has implemented measures to protect its competitive advantage and maintain a strong market position is crucial. Different open-source licenses have varying requirements and restrictions. Failing to choose an appropriate license at the beginning can lead to disputes and licensing wars, as seen in the Elastic and Amazon dispute. 

To avoid such disputes, companies should carefully decide on the license from the start and seek guidance from a legal firm to ensure they have made the right decision. For example, in the case of OpenSaaS, it is essential to have appropriate licenses in place to safeguard the company’s intellectual property and prevent competitors from exploiting the open-source code without contributing back to the community.

By incorporating these practices, the Tech DD process ensures that companies with open-source products navigate licensing issues effectively and operate within the bounds of applicable legal regulations. Monitoring solutions such as FOSSA are as essential as security scans for open-source products, and something we especially look for as part of a Tech DD.

Conclusion

Open-source is not just about code; it’s about building ecosystems that thrive on collaboration and openness. The advantages of open source, from community collaboration to increased transparency and flexibility, cannot be overstated. As businesses continue to explore creative monetization strategies and navigate the challenges with finesse, the potential for growth and success in the open-source tech landscape is undeniable.

In the realm of open-source, it is crucial to approach intellectual property with a different perspective in a Tech DD process. Unlike proprietary software, where IP is closely guarded, open-source encourages a different approach. While protecting IP is still important, the focus shifts towards fostering collaboration and allowing the community to contribute and innovate. This requires a delicate balance of managing IP rights while maintaining an environment that encourages open collaboration. Effective community management becomes a vital aspect of open-source projects. Ensuring that contributors feel valued, their ideas are heard, and conflicts are resolved effectively is key to building a thriving open-source community. Moreover, code and documentation quality take on greater significance. Maintaining high standards of code and documentation becomes crucial for ensuring the project’s success and longevity. By placing proper focus on these factors during Tech DD, investors can gain a comprehensive understanding of the company’s position and potential in the open-source ecosystem.

Open-source presents a promising landscape for investors who understand its potential and are willing to navigate its complexities. While the risks are real, so are the rewards. Investing in open-source is not a path for the faint-hearted, but it’s a journey filled with opportunities. 

This is a guest blog post by Kamyar Paykhan, TechMiners .

About the Author:

Kamyar Paykhan works as a Senior Technology Analyst at TechMiners. Kamyar is a seasoned CTO with extensive experience across multiple ventures, specializing in AI, cloud computing, and orchestrating software engineering teams at scale.

About TechMiners:

TechMiners is a data-driven Technology Due Diligence provider, offering trusted advisory services from experienced CTOs and providing in-depth insights through proprietary software.

Find out more about TechMiners here – https://www.techminers.com/

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