What should I watch out for when hiring an overseas software developer?

QUESTION:

I want to hire an overseas software developer. What should I watch out for? I’m worried that they may steal my IP. I’m also worried that they may not deliver and I’ll have no recourse. But I can’t afford a US developer. Any advice would be appreciated.

ANSWER:

Ethan Stone

by Ethan Stone, Stone Business Law

First, a quick but important clarification: I’m not your lawyer and this answer doesn’t establish a lawyer-client relationship. I’m giving a generic answer to a generic question to educate the users of this site. The information below is general in nature and should not be understood as a substitute for personal legal advice.

On the one hand, there’s no easy answer to this question. If you hire someone in a remote country with a less-than-ideal legal system, you’re going to run some risks. That said, developers in the U.S. can be pretty geographically remote from you and our legal system, though better than many, is also far from frictionless. So start out with a realistic assessment of the alternative. If you hire a developer in the U.S. she can still take your stuff and/or fail to produce and you may have a very hard time doing anything about it. So keep your focus on what you really want (functioning code so you can get on with your business), not the booby prize (a lawsuit). That said, there’s a difference between dealing with someone that would be hard to go after and someone who would be effectively impossible to go after. Here are a few pointers.

Reputation

First, reputation is important. When I say that, I mean it should be important to you and to the developer. If someone comes with good recommendations from several trusted sources, that will give you some comfort that they’re OK. Moreover, that person has something to lose – a good reputation and the future business that comes with it – even if you can’t hold them legally responsible.

Payment

In big deals, there are subtle ways to avoid paying if you don’t get what you paid for, such as escrows and letters of credit. In most cases, these arrangements are overkill and will cost you more than they save. Your best protection is to agree to pay only after the developer has delivered the goods to your satisfaction. Of course, a savvy developer will worry about that arrangement for the same reason you’re worried about paying up front. The usual result is some combination of up front and back end payments. In complicated development deals, there are generally a series of progress payments when the developer achieves set milestones. If you possibly can, however, you should make sure that you owe a significant final payment only after you’ve “accepted” the final delivery (i.e. you’ve got it and tested it and it meets your specs).

Protecting Your IP

Assuming you’ve found someone with a decent reputation, you should still be careful about your IP. You should think about this in two ways.

Protecting Yourself from IP “Theft”

The first is the concern you stated: Protecting yourself from theft. The best way to deal with this is to try to be more precise about what IP could be “stolen” in a way that would hurt you and avoid turning that over if you don’t have to. This may not seem obvious to you. If the IP “belongs” to you, shouldn’t you be worried about losing it? Yes and no. I’ll go through a few categories that might occur to you.

Your Basic Business Idea

By “basic business idea,” I mean your business plan in a nutshell. For example, “an iPhone app that will [fill in function here].”

Generally speaking, you shouldn’t spend a lot of time worrying about people stealing this kind of idea for two simple reasons. First, several people are probably already working on the idea, even if you don’t know about it. The time you waste worrying about someone stealing your idea is time they’ll be using to execute on it. Second, this kind of idea will almost always be apparent to everyone as soon as you launch your business. Unless there’s a patentable invention involved, you’ll have no protection at that point. So if it’s a good idea, you’ll quickly have competition. If you succeed in building a viable business, it will have a lot more to do with executing well than with the “aha moment” that started you off.

If you do think you might have some patentable inventions, there are some steps you should take but I’ll discuss them in the section on “Protecting Your Claims to IP.”

Good, Functional Code

What I mean by “good, functional code” is a workmanlike (or even artful) product that gets the job done but isn’t unique. For the most part, you hire a talented software developer to produce this kind of code. That’s not to denigrate coders. Transactional lawyers produce much the same thing and we take great pride in our work. But the value is in the thought and care that goes into crafting a product that works well, not the specific text.

So here, also, it’s rarely worth worrying about “theft.” In theory, if the developer keeps some particularly clever code for use on his next job, he might be “stealing” your copyrighted work, but so what? Any benefit the developer gets from the “theft” will not really be to your detriment; you almost certainly benefited from similar minor “thefts” when he wrote your code. So just relax and look to the next section on “Protecting Your Claims to IP” to make sure you own the code in the first place.

“Secret Sauce”

What I mean by “secret sauce” is something that’s important but won’t be apparent to anyone who uses or hears about your business. The classic example is an algorithm. If you use Google, Amazon or Netflix, you’ll notice that they have ways of predicting things you might be looking for, but you won’t have any idea how they do it. Their code incorporates very effective algorithms to accomplish those results. They keep those algorithms under lock and key. For good reason: From a legal perspective, these are “trade secrets” and they are legally protected so long as the owner takes reasonable measures to keep them secret.

It’s definitely worth worrying about the theft of your secret sauce. Legally speaking, you can keep rights in your trade secrets if you use reasonable measures to protect them from disclosure, even if someone actually makes off with them. That said, you want to have secret sauce, not spilled beans and a lawsuit. So if you have trade secrets, try to come up with a strategy to avoid handing them to outsiders at all. Software is, in any event, developed in modules, linked libraries and the like, so this should generally be possible. You can still get a lot of the cost benefit of hiring an offshore developer, even if you have to do some “core” coding yourself or hire an on-shore employee to do it.

Protecting Your Claims to IP

Even if you aren’t worried about protecting yourself against theft (for the reasons discussed above), you still need to think about protecting your claims to IP for two related reasons. First, you need to use your IP to run your business, so you need to make sure that you have a clear right to do that. For example, I’ve applied for federal trademark registration of my logo, not because I think it is or will be hugely valuable but because I want to make sure that no one can disrupt by business by questioning my right to use it down the line. Second, you may need to go through a “legal diligence” review if you seek outside financing or, eventually, if you sell the business. At that point, the lawyers will be looking for evidence that you’ve taken sufficient measures to establish and protect your legal claims. It will go much easier if you pass with flying colors, rather than having to convince a potential investor or buyer that your failures don’t matter.

Luckily, this kind of IP protection is entirely in your control. You just need to know what kind of IP rights you have and then take the appropriate steps to protect your claims to them.

If you’re hiring anyone to work with your IP or produce it for you (e.g. write computer code), it’s important that they sign a comprehensive agreement to keep your confidential information confidential and assign anything they create to you (and, if appropriate, establishing that any copyrightable work product is “work for hire”). Consistently requiring confidentiality agreements is more-or-less the minimum you have to do to establish that you took reasonable steps to keep your trade secrets secret (i.e. to protect your rights in them). Likewise, an effective assignment agreement will establish, or give you the means to establish, your rights in any IP produced. If you’re hiring an offshore developer, make sure your agreement specifies that it will be governed by the laws of a U.S. state (generally, you should choose the one where you’re located) and that all disputes will be resolved in a location in the U.S. (generally, wherever you are). Ideally, it would be nice to make sure the agreement is enforceable under the laws of the developer’s home jurisdiction. Unless it’s a very big deal, however, worrying about that is usually overkill. Again, if you need to enforce it, you’ll pretty much be out of luck, whether or not you succeed in your lawsuit.

If you think you might have patentable inventions, you need to take some additional steps, preferably before you disclose anything about them to anyone (especially anyone who hasn’t signed a confidentiality agreement). The first and most important is to consult with an experienced patent lawyer. Patent prosecution is a very specialized area of practice, so go to someone who specializes in it (for example, not me). A lawyer can help you figure out what might or might not be patentable and take steps to secure your rights, such as filing a patent application or a provisional patent application. Do not,under any circumstances, try to do this on your own. You are guaranteed to mess it up, probably in ways that can’t be fixed later.

I hope this helps. Good luck developing the code and launching the business!