outsourcing software development

For many startups, one of the first major expenses they incur is hiring a software developer. If you and your cofounders’ skillsets lie in other areas, you will likely need to hire a developer sooner rather than later in order to get your application or product ready for launch.

But, before you hire your friend from college or choose an offshore developer off of Fiverr, you need to consider the legal implications involved. Legally speaking, software development is a complex area. If your startup does not take the necessary steps to protect itself and its rights in the software, you may find that the final product is not what you expected.

Before you hire an independent contractor to develop software for your startup, here are nine important considerations to keep in mind:

1. Make Sure the Developer is Qualified for the Job

First and foremost, you need to make sure the developer you choose is qualified for the job. Ideally, he or she will have a solid portfolio and professional references, and will be able to explain in clear terms the scope of development required for your project. An experienced independent software developer will also understand the relevant issues discussed below (such as IP ownership and data security standards), and should be able to deliver a quality product on time and on budget. If you fail to do your due diligence and choose an unqualified developer, you could end up with a worthless or outdated application that requires you to start over with another developer from scratch.

2. Structure the Relationship to Avoid Employment Implications

There are several important legal distinctions between hiring an “independent contractor” and hiring an “employee.” When you are outsourcing software development, you need to make sure that the relationship falls squarely into the independent contractor model. Along with the tax obligations (and the administrative burdens that go along with them), hiring an employee has liability and other implications as well. While it may ultimately make sense to hire a full-time developer (or a team of developers), when looking to outsource, you need to make sure you understand how to avoid having your developer classified as an employee.

3. Include Software Testing and Code Revisions in Your Contract

When crafting your independent contractor agreement, there are several key provisions you need to include. Among them, you should be sure to include rights to test the software and have the code revised at various stages along the way. The last thing you want is to wait for a single “end product” and find that you have not protected yourself against paying extra for bug fixes or modifications. What is necessary will depend on the scope of the project and the length of the development timeline, and you want to make sure the developer understands these provisions so that he or she does not complain when you point to the relevant provision of your agreement.

4. Ensure that Your Startup Owns the IP

While the independent contractor model has numerous benefits, one of its key limitations falls in the area of intellectual property (IP). With an employee, most forms of work product created within the scope of employment are automatically considered “works made for hire,” which means that the IP rights are legally owned by the employer. However, this is not the case with an independent contractor. In order to ensure that your startup owns the source code, executable files, and all other relevant IP, you will need to clearly address ownership in your agreement.

5. Restrict the Developer from Creating Similar Applications

Even if you secure ownership through adequate work-for-hire and intellectual property assignment provisions, you still need to separately ensure that the developer does not retain a license to create similar works for other startups or competitors. While it is typical for developers to retain rights to reuse and create derivative works from standard code, anything created specifically for your startup should be reserved for your company’s exclusive use.

Similar to the testing and revision provisions discussed above, making sure the developer understands your agreement is just as important as having the necessary language in place. If the developer does not understand the restrictions in your contract and sells a similar application to another company, it could quickly become too late to avoid the damaging consequences.

6. Maintain Confidentiality and Control Over Information

In addition to protecting the software itself, you also need to protect your startup’s confidential information. Your independent contractor agreement should include comprehensive non-disclosure provisions that prevent the developer from discussing your business plan or disclosing the details of your project with anyone outside of your company.

7. Make Sure the Software is Legally Compliant

Depending upon the industry and population in which your product or application will be used, there are a wide range of data security and other legal requirements that may apply. From the Health Insurance Portability and Accountability Act (HIPAA) to laws that apply to the privacy of children’s personal information, software development must often be undertaken with a clear understanding of detailed laws and regulations at the state and federal level. If you need your software to be HIPAA-compliant or to meet any other specific legal standards, you will want to make sure your developer has the requisite knowledge and include appropriate provisions in your independent contractor agreement.

8. Make Sure the Software Meets (or Exceeds) Industry Standards

While meeting your startup’s legal obligations should be the baseline, you will likely also want your product or application to meet or exceed industry standards. In some cases, the law establishes a bare minimum that has been far surpassed in the market as a result of innovation and consumer demand. Your customers – especially corporate customers – will expect data security and other attributes that meet or exceed industry standards, so you should make sure your developer is up to the task.

9. Consider Any Applicable Import/Export Implications

Finally, if you hire a software developer overseas, you will need to assess any import and export laws that may apply. Many countries in Europe, for example, have strict data import and export requirements that need to be addressed contractually in order to avoid unnecessary and costly legal implications.

Of course, this list is far from exclusive. There are several key provisions that should be included in any software development contract. From insurance and liability to IP registration, there are numerous other issues that need to be addressed with regard to proprietary software as well. Your startup’s proprietary software is likely to be one of its most valuable assets, and you need to treat it accordingly. From a legal perspective, this means planning ahead – having the necessary contractual protections and having a strategy for both minimizing your company’s risk and protecting its exclusive rights so that you can extract maximum value from your custom application.

Jiah Kim & Associates | Legal Counsel for Startups

If you are preparing to hire an independent software developer and want to make sure your startup is protected, we encourage you to contact us so that we can help. Jiah Kim & Associates is an international law firm that represents startups and established companies in contractual and intellectual property matters. To request an appointment, you can contact us online or call (646) 389-5065 today.
This blog post is written for educational and general information purposes only, and does not constitute specific legal advice. You understand that there is no attorney-client relationship between you and the blog publisher. This blog should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.

Subscribe to our newsletter to receive more helpful tips about how to pass on your properties and legacy to the next generation

Jiah Kim & Associates

1562 First Ave #205-2004

New York, NY 10028