Open-Source Licensing Risk in Blockchain Startup Diligence
For an India-linked blockchain startup, open-source code can be both the product’s fastest route to market and its least visible deal risk. A protocol may combine client software, wallet libraries, cryptography packages, smart-contract templates, front-end components and infrastructure tooling from many repositories. A buyer or investor needs to know not merely what runs in production, but which licence terms attach to it, who introduced it and whether the planned commercial model is compatible with those terms.
Start With a Software Bill of Materials
The first diligence deliverable should be a software bill of materials covering source code, package-manager dependencies, copied snippets, smart-contract libraries, build images and code supplied by external studios. For each material component, record the version, source repository, licence identifier, modifications, distribution route and the team owner. A repository scan is a useful beginning, but it should be reconciled to deployed contracts, release artifacts and third-party development statements of work.
Investors should ask for prior scan reports and the exceptions log, not just a clean current scan. An unrecorded dependency can surface during a strategic sale, when a counterparty compares the disclosed stack with public commit history. The aim is traceability: a technical lead should be able to explain why every material component is present and what obligation follows from it.
Read Licence Terms Against the Revenue Model
Licence labels are not risk ratings. The Apache License 2.0 includes conditions for redistribution, notices and modifications, and also addresses patent permissions. Other licences may create different obligations when modified code or a combined work is distributed. Whether a particular integration triggers a requirement depends on the actual licence, architecture, manner of use and distribution facts; a generic “permissive” or “copyleft” label is not a legal conclusion.
For blockchain businesses, test the licence inventory against the intended model: hosted infrastructure, a consumer wallet, an enterprise node deployment, a code-release programme, token-related tooling or a buyer’s planned product integration. Keep the original licence text, NOTICE files and copyright notices with the diligence file. The GNU GPL version 3 text is one example of why teams must examine the governing text and not rely on a package name alone.
Establish Code Provenance and Company Rights
An open-source review cannot be separated from chain of title. A founder, employee, contractor or community contributor may have committed proprietary code alongside third-party components. The Copyright Act, 1957 materials published by the Copyright Office provide the statutory backdrop for copyright ownership, assignments and licences; the transaction file must still show that the company received the rights it claims.
Review employment terms, consulting agreements, contributor licence arrangements, pull-request policies and repository permissions. Identify pre-incorporation code and side projects explicitly. The Indian Contract Act, 1872 on India Code is relevant to the contractual promises that allocate work product, cooperation and remediation duties. If a key module was supplied by a development studio, obtain the underlying statement of work, acceptance evidence and any back-to-back licences rather than accepting a high-level assurance.
Make Remediation a Deal Workstream
Material findings should become an owned remediation plan. Possible steps include adding omitted notices, replacing a component, obtaining a commercial licence, segregating a module, publishing required materials, correcting repository history or securing confirmatory assignments. A plan should identify the technical owner, legal owner, cost, dependency on a release cycle and the consequence if the fix is not complete at closing.
Board records matter where the company is entering a significant licence, releasing core code or approving a material remediation budget. The Companies Act, 2013 materials hosted by NCLAT are a useful reference point for corporate authority and record keeping. Where the business provides services related to virtual digital assets, the team should also keep its operating analysis distinct and current against FIU-IND’s VDA guidance; a code licence review does not resolve a separate operating-perimeter issue.
What a Deal Team Should Request
Request the bill of materials, scan outputs, licence policy, open-source approval workflow, repository access list, contributor and contractor documents, exception register, deployment inventory, notices and remediation tracker. Classify findings by commercial impact rather than raw dependency count. A missing attribution notice may be fixable before signing; an unclear licence affecting a core proprietary module may require a closing condition, a targeted indemnity, a price adjustment or a redesigned release plan.
Common Mistakes
- Treating a scan report as the entire answer. Scan output must be matched to deployed code, architecture and the actual commercial model.
- Assuming every permissive licence is harmless. Notice, attribution, patent and redistribution terms still need an evidence-based review.
- Ignoring contractor and founder contributions. A licence inventory does not prove that the company owns its original modifications.
How KAS & Co. Can Help
KAS & Co. helps India-linked Web3 founders, investors and acquirers organise open-source diligence, contributor rights, remediation plans and transaction protections. For a focused review before funding or an acquisition, contact KAS & Co..
FAQs
1. Is open-source code a reason to avoid a blockchain investment?
No. Open-source components are often commercially valuable. The issue is whether the company has identified applicable terms, preserved the required evidence and aligned its product plan with those terms.
2. What should be in a blockchain startup’s software bill of materials?
It should identify material dependencies, versions, licences, source locations, modifications, deployment use, notices and a responsible owner for each item.
3. Can a buyer rely on a developer’s statement that no restricted code was used?
Not alone. The statement should be tested against repository history, scans, package manifests, deployment artifacts and the contributor documents.
4. When should open-source findings be fixed in a transaction?
Resolve material issues before signing where possible. If timing prevents that, assign a scoped remediation plan, ownership, milestones and appropriate deal protections.
Sources
Topics
Need legal advice on this topic?
KAS & Co. provides strategic legal counsel across technology law, data privacy, IP and commercial advisory.
Schedule a Consultation