The "Silent Killers": Top 5 Software Asset Risks for Investors

1. Open-Source License Contamination (Copyleft Exposure)

• The Issue: Improper integration of "copyleft" licenses (e.g., GPL v2/v3, AGPL) that legally mandates the disclosure of proprietary source code.

• Deal Impact: Can instantly nullify IP exclusivity and defensibility, forcing a choice between open-sourcing the "secret sauce" or a costly, time-critical code remediation (refactoring) post-close.

• Why It’s Missed: Standard diligence relies on automated scans that count licenses but fail to map linking architecture (static vs. dynamic), which is the actual legal trigger for contamination.

• Validation Steps:

  • [X] Deep Dive Scan: Audit specifically for AGPL in backend/network-exposed components.

  • [X] Architecture Review: Confirm "Chinese Wall" separation between copyleft libraries and proprietary core code (e.g., via API isolation).

  • [X] Policy Check: Review the internal OSS approval process and "maintainer" lists.

2. Architectural Debt & Scalability rigidity

• The Issue: Fundamental structural design choices (e.g., tight coupling, monolithic dependencies) that severely limit scalability or speed of iteration, even if the software functions correctly today.

• Deal Impact: "Hidden CAPEX." The acquisition thesis often relies on growth, but the asset may require a 12+ month re-architecture before it can handle 10x users or new market features, effectively freezing ROI.

• Why It’s Missed: Technical debt is invisible in a demo. It only manifests under load or when attempting to add new features.

• Validation Steps:

  • [X] The "Monolith" Check: Request diagrams showing module decoupling.

  • [X] Change Velocity: Audit the "Cycle Time" (time from code-commit to production-deploy). High friction = high debt.

  • [X] Failure Mode Analysis: Ask "What happens to the system if [Core Service A] goes down?" (Look for cascading failures).

3. Software Supply Chain & Dependency Risk

• The Issue: Operational and security exposure inherited from third-party libraries, particularly "transitive" (nested) dependencies or abandoned open-source projects.

• Deal Impact: A single critical vulnerability in a deep dependency (e.g., Log4j) can trigger emergency shutdowns, reputational crises, and forced audits—often occurring immediately after the deal closes.

• Why It’s Missed: Diligence often reviews only "direct" dependencies (top-level), ignoring the hundreds of nested libraries that actually execute in production.

• Validation Steps:

  • [X] SBOM Quality: Require a Software Bill of Materials (SBOM) that includes transitive dependencies.

  • [X] "Bus Factor" of Deps: Identify critical libraries maintained by single individuals or abandoned projects (last update >2 years ago).

  • [X] Patch Latency: Measure the average time taken to patch critical CVEs in the past 12 months.

4. Unmanaged Infrastructure & Shadow IT

• The Issue: Active but untracked infrastructure, environments, or SaaS accounts ("orphaned assets") that remain billable and accessible.

• Deal Impact: Creates a dual risk of financial bleed (paying for unused capacity) and security backdoors (unpatched, forgotten servers are prime attack vectors).

• Why It’s Missed: Diligence teams focus on the "Production" environment. Risk often hides in "Dev," "Test," or legacy accounts that were never decommissioned.

• Validation Steps:

  • [X] Reconciliation: Match the cloud provider bill (AWS/Azure invoice) line-by-line against the active asset inventory.

  • [X] Identity Audit: Scan for admin accounts belonging to departed employees.

  • [X] Environment Audit: Verify that non-production environments have automatic "spin-down" rules.

5. Key-Person Dependency (Knowledge Concentration)

• The Issue: Critical system knowledge (logic, deployment, troubleshooting) concentrated in 1-2 individuals, with little to no documentation.

• Deal Impact: An "Asset Continuity" risk. If the lead architect leaves post-earnout, the codebase may become a "black box" that is too risky to modify, stalling the roadmap.

• Why It’s Missed: Investors assess talent but not knowledge distribution. A brilliant CTO is a risk if they are the only one who understands the deployment script.

• Validation Steps:

  • [X] The "Vacation" Test: Review commit logs during the lead engineer's last time off. Did velocity drop to zero?

  • [X] Documentation Audit: Ask a junior engineer to explain the "Deploy to Production" process using only the written documentation.

  • [X] Code Ownership: Run a git analysis to see if >50% of the core code was written by <2 people.