6 Key Issues Every Entrepreneur Must Know Before Signing a Software Development Agreement

Hiring a software developer feels exciting, until a contract clause quietly decides that you don’t actually own your software.

In reality, a software development agreement doesn’t just manage a project. It decides ownership, control, and whether your business can scale or exit in the future.

Most entrepreneurs do the same thing. They hire an expert to build a software or app. Then they’re handed a template agreement and told, “This is our standard contract."

Here’s the truth most people don’t realise: There is no such thing as a “standard” software development agreement.

Every clause shifts power. Every sentence affects your rights.

Before you sign anything, you need to understand what really matters inside that document.

Let’s walk through 6 key issues every entrepreneur should look out for in a software development agreement in plain English, no legal background required.

#1 Intellectual Property Ownership: Who Really Owns the Software?

Intellectual Property ownership decides whether the software you paid for legally belongs to you, or your developer.

This is the most important clause in any software development agreement (aka SDA).

Under the Malaysian Copyright Act 1983, a software can be protected under copyright.

Section 26(2)(a) of the Copyright Act states that,

“……, where a work is commissioned by a person who is not the author’s employer under a contract of service or apprenticeship, the copyright shall be deemed to be transferred to the person who commissioned the work, or the author’s employer, subject to any agreement between the parties excluding or limiting such transfer”

So, if the software is created as a commissioned work, the default legal position is:

👉 The customer owns the copyright

Sounds reassuring, right? But here’s the catch.

That default position can be completely reversed if the software development agreement says otherwise, pursuant to Section 26(2)(a) of the Copyright Act.

So, it is important to be mindful whether the SDA contains such clause.

There’s no universal “right or wrong” model, but you must know which one you’re agreeing to. The typical structures include:

• Immediate ownership

  • Copyright belongs to the customer from the start

• Ownership after full payment

  • Developer owns everything until the last cent is paid

• Licence-only model

  • You can use the software, but you don’t own it

    
    

Each option has very different consequences for funding, scaling, or selling your business.

#2 Confidentiality and No Reuse of Ideas

A confidentiality clause decides whether your ideas, data, and business logic remain exclusive to your business, or quietly become reusable assets for someone else.

Many entrepreneurs treat the confidentiality clause as a standard, boilerplate section that “lawyers always include anyway”. In a software development agreement, that assumption can be costly.

Confidentiality is not just about stopping leaks to competitors. It is about protecting the thinking behind your software, including the ideas, workflows, and commercial logic that give your product its value.

What should “Confidential Information” really cover?

Always start by checking how “Confidential Information” is defined in the agreement.

A well-drafted definition should include more than just documents marked “confidential”. It should at least clearly cover:

• Your underlying ideas and concepts

• Process flows, system logic, and software structure

• Source code, prototypes, and draft versions

• Data, databases, and user information

• Business plans, pricing models, and operational strategies

**Could be more depending on your business needs!

If these are not clearly included, you may later discover that the most valuable parts of your software were never protected in the first place.

Preventing reuse of your software and ideas

Another issue entrepreneurs often overlook is reuse.

If the agreement does not expressly prohibit it, a developer may reuse parts of your software, code structure, or system architecture for another client. From the developer’s perspective, this may feel efficient or commercially reasonable. From your perspective, it can dilute your competitive advantage and undermine the uniqueness of your product.

You may require the software development agreement to clearly state that: The developer cannot reuse your software, code, system structure, ideas, workflows, or business logic for other clients.

This is especially important where your software is built around a distinctive business model.

Confidentiality and sub-contractors

In real projects, it is common for a developer to outsource part of the work to a sub-contractor.

This raises an important question: Are those sub-contractors bound by the same level of confidentiality obligations?

If the agreement does not extend confidentiality duties to sub-contractors, your confidential information may legally pass through multiple parties without adequate protection. In many disputes, the issue is not intentional misuse, but gaps in contractual coverage.

#3 Third-Party Software and Open-Source Risks

In modern software development, it is entirely normal for developers to use third-party libraries, APIs, frameworks, and open-source components. Not all software is written entirely from scratch.

The legal risk does not come from using third-party or open-source software. It comes from not knowing what is being used and on what terms.

Third-party and open-source software can expose your business to copyright and IP risks if the licensing position is unclear.

Why disclosure matters in a software development agreement

Your software development agreement should require the developer to clearly disclose:

• Which parts of the software rely on third-party libraries or open-source components

• The applicable licence terms for each component

• Whether those licences allow commercial use, modification, and distribution

  
  

Without this transparency, you may assume you fully own and control the software, only to discover later that certain components come with restrictions.

The hidden copyright and IP infringement risk

If a developer uses third-party or open-source software without proper licensing, the risk does not stop with the developer.

In many cases, it is the business commercialising the software that faces the copyright or other intellectual property disputes, or worse, take down demands.

This often catches entrepreneurs by surprise, because they never chose the library or wrote the code. Yet legally, they are the ones deploying and monetising the software.

Why indemnity is critical

To manage this risk, you may wish to include in the software development agreement to require the developer to:

• Warrant that all third-party and open-source software is properly licensed

• Indemnify you against any copyright or IP infringement claims

  
  

Without an indemnity clause, the legal and financial exposure may sit entirely with your business.

#4 Clear Job Scope, Milestones, and Payment Terms

A proper software development agreement should at least clearly set out these five things from the start:

1. What the developer is required to build

2. The software specifications and features

3. The development milestones

4. The timeline for each milestone

5. When and how payments are made

   
   

These five elements work together. If one is vague, the entire project becomes difficult to manage.

Without clear milestones, it becomes hard to assess whether the developer is actually progressing according to plan. Disputes often arise not because the software is “bad”, but because expectations were never clearly aligned in writing.

What happens if milestones are not met?

You should pay close attention to the consequences of delay or non-delivery.

Key questions to look for in the agreement include:

• Are you entitled to terminate if milestones are missed?

• Is there a grace period or cure period?

• Can you ask for a refund?

• If yes, how much of the fees are refundable?

  
  

If the agreement is silent on these points, enforcing accountability later becomes difficult.

#5 Change Request Control

From a developer’s perspective, constant changes during development can be frustrating and disruptive. From a customer’s perspective, some changes are inevitable as the business evolves.

Change request clauses decide how flexible the project can be without causing cost overruns and delays.

This is why change request control is critical in a software development agreement.

Why change requests need a formal process

A well-drafted agreement should clearly set out:

• How change requests are made

• How changes are assessed

• Whether changes affect cost and timeline

• When additional fees apply

  
  

Without a proper procedure, disagreements over scope creep are almost guaranteed.

Indeed, it is reasonable for developers to charge additional fees when the change goes beyond the original specifications, requires rework of completed modules, or other unforeseen circumstances.

These situations should be clearly described in the agreement so both parties know where they stand. Balance is key. The agreement should provide objective criteria or a mutual review process, not unilateral decision-making.

#6 Termination and Exit Strategy

A termination clause determines whether you walk away with usable software or nothing at all.

It is prudent to ask one uncomfortable question at the start of any project: What happens if this relationship fails?

A good software development agreement plans for both success and failure.

Scenario 1: Early termination

Early termination may happen for many reasons, such as:

• The developer misses milestones

• The customer fails to follow the payment schedule

• Commercial priorities change

  
  

In this situation, the agreement should clearly address:

• Whether the developer must hand over the source code

• Whether the customer retains Intellectual Property created up to that point

• Whether any refund or compensation applies

  
  

Without clarity, termination often lead directly to disputes.

Scenario 2: Project completed successfully

Even when everything goes well, the exit process still matters. The agreement should require the developer to hand over:

• All source code

• Development tools and repositories

• Credentials, access rights, and documentation

• Deliverables necessary to maintain or further develop the software

  
  

Completion does not end obligations automatically. Handover must be clearly defined.

What This Means for Entrepreneurs

A software development agreement is not just an administrative document you sign before coding begins. It is a strategic business tool that determines who owns the software, who controls the Intellectual Property, how risks are allocated, and whether your business can scale, pivot, or exit in the future.

Across the six issues discussed above, a common theme emerges. Most disputes do not arise because founders are unreasonable, or developers are dishonest. They arise because the agreement is vague, unbalanced, or copied from a template that does not reflect the commercial reality of the project.

For entrepreneurs, the key takeaway is simple. Software creates value only when you have legal control over it.

A well-structured software development agreement protects that control from day one, not after a dispute has already started.

Need Help Reviewing or Drafting a Software Development Agreement?

At LAWENCO, we work closely with entrepreneurs, software developers, founders, SMEs, and technology companies to draft, review, and negotiate software development agreements that protect Intellectual Property, manage commercial risk, and support long-term growth.

📩 Contact LAWENCO to discuss how we can help you structure a software development agreement that works for your business, not against it.

Written by,

Lawrence Tan 

Registered Trademark, Patent and Design Agent

LL.B (HONS), CLP

Advocate & Solicitor

Disclaimer: The above information is merely for general sharing and does not constitute any legal advice. Readers are advised to seek individual advice from the professionals.