Kevin Jun Lin, Corporate Lawyer

Case:

At the end of 2024, a Beijing-based enterprise management software company that had been in business for seven years reached its end. After a roller-coaster ride—from its peak of 300 employees and annual revenue of RMB 80 million to a final remnant of just 43 employees and 18 consecutive months of losses—the founder decided to initiate liquidation proceedings.

However, once liquidation began, the investors and the founder discovered a brutal reality: the company’s tangible assets were shockingly meager. As a typical software company, its balance sheet showed total fixed assets of merely RMB 960,000—32 used computers, a few out-of-warranty servers, and some office furniture. Yet at that point the company had only RMB 1.87 million in cash, while facing RMB 23 million in accounts payable, RMB 6.67 million in employee wages and severance, and RMB 42 million in investment funds contributed by investors—the priority, order, and means of repayment of these funds became the core of intense contention among all parties.

Looking back, the company’s founder said this during the later stages of liquidation: “If we had thought about what to do on the day of liquidation when we raised funds three years ago, we could have recovered 2 to 3 times the value for all stakeholders.“

This is the central proposition of this article: the asset-light nature of software companies means that their liquidation is not a simple “sell the desks and split the cash”—it is a complex systems engineering project involving the transfer of intellectual property, the restructuring of talent, the disposition of data assets, and the determination of the fate of the code.

I. The Asset-Light Nature of Software Companies—the “Book-vs-Reality Divergence” Dilemma in Liquidation

1.1 Visible Assets and Invisible Value

The liquidation of a traditional enterprise is relatively straightforward—factories can be sold, equipment auctioned, raw materials liquidated, and accounts receivable collected. The liquidation of a software company faces a fundamental contradiction: the assets that constitute the company’s core value are almost zero on its balance sheet.

Taking the case at the beginning of this article as an example, the company had the following “off-balance-sheet value”:

• A continuously operating enterprise management system: a SaaS platform serving 87 paying customers, with over 1.2 million lines of code, built by the core team over seven years. Book value: RMB 0.
• Industry-specific algorithm models: algorithm models trained on the business logic of a specific niche industry, accumulating massive volumes of industry data. Book value: RMB 0.
• Customer relationships and data: historical transaction data, configuration parameters, and customization requirement records of the 87 customers. Book value: RMB 0 (but constituting the technical information and business information as defined in Article 9 of the Anti-Unfair Competition Law).
• Technical team experience: of the 43 employees, 17 have more than five years of product development experience at the company; if this team were to disband on the spot, the tacit knowledge it has accumulated would vanish entirely. Book value: RMB 0.
  

1.2 The “Failure” of Liquidation Preference in the Software Industry

The “liquidation preference” clause commonly found in venture capital agreements—providing that the investor recovers the invested principal first in a liquidation (typically 1x or 1.5x), with the remaining assets then distributed pro rata by shareholding—faces a paradox in the liquidation scenario of a software company:

Statutory interpretation: Pursuant to Article 236 of the newly revised Company Law, after the company’s property is used to pay liquidation expenses, employees’ wages, social insurance premiums, and statutory compensation, to pay the taxes owed, and to satisfy the company’s debts, the remaining property shall be distributed among shareholders in proportion to their capital contributions for a limited liability company, and in proportion to the shares held by shareholders for a company limited by shares.

Liquidation property includes all property owned by the company at the time of dissolution and property acquired during the liquidation period.

The problem is: what exactly is the “company property” at the time of a software company’s liquidation? If intellectual property (source code, algorithms, brand) has a book value of zero on the balance sheet, yet the actual market value of these assets may reach tens of millions of yuan or more, then the price and method at which these assets are monetized determine how much each party can recover. The current Company Law lacks specific guidance on the liquidation and realization of intangible assets.

II. IP Ownership Arrangements—the Biggest Minefield in Liquidation

2.1 The Trap of “Whoever Wrote the Code Owns It”

When entering liquidation proceedings, a question that catches many founders off guard surfaces: who exactly owns the company’s source code?

This is not a ridiculous question. In practice, the following common IP ownership pitfalls exist:

• Missing ownership agreements for employee works made for hire: Under Article 18 of the Copyright Law, a work created by a natural person to complete the tasks of a legal entity is a work made for hire. But in the software industry, many early employees joined as “technical consultants” or “part-time developers,” without even a formal labor contract with the company, let alone an IP ownership agreement.
• No IP assignment agreed for outsourced development: In the early startup phase, to launch a product quickly, many software companies outsource the development of certain modules. If the outsourcing contract only provides for “delivery of source code” but not for “assignment of intellectual property,” the outsourced developers may still retain moral rights such as authorship or even partial copyright in the code.
• License conflicts from open-source components: If the company’s product embeds open-source code under “viral” licenses such as GPL, the integrity of the entire code base’s IP may be challenged—if a buyer discovers GPL code in the repository during liquidation, it may simply abandon the acquisition or sharply cut the price.
• IP not assigned by co-founders: Many technical co-founders started writing code before the company was formally established; if these “pre-incorporation technical achievements” are not assigned to the company by a written agreement, the co-founders may claim independent ownership of this code during liquidation.
  

2.2 Practical Recommendations: Closing the Loopholes at the Source

At the investment negotiation stage (not at liquidation), the investor should require the company to complete the following IP due diligence and remediation:

1. IP assignment confirmation letters: all personnel who made substantial contributions to the company’s core product code (including departed employees, outsourced developers, and co-founders) must sign IP assignment confirmation letters, explicitly assigning the IP in their code contributions to the company.
2. Open-source license scan report: before the investment closes, complete an independent open-source license compliance scan to identify all open-source components used and their license types, and assess whether there is any viral license risk.
3. Software copyright registration: complete software copyright registration for the company’s core software products. Although this is not conclusive proof of IP ownership (software copyright protects expression rather than ideas), it can serve as important evidence that the company owns rights in the code during liquidation.
   

III. Team Acquisition Priority—the Most Valuable yet Most Overlooked Asset in Liquidation

In Silicon Valley’s venture capital ecosystem, there is a well-known concept called “Acquihire,” where a company’s primary value lies in its team, and the acquirer’s main purpose in buying the company is to obtain the team rather than the product. In the software industry, talent acquisition is an important mode of liquidation/exit.

3.1 The Status Quo and Challenges of Talent Acquisition in China

In China, due to differences in the legal system and corporate culture, pure “Acquihire” is relatively rare, but “talent recruitment with asset-acquisition characteristics” is very common in practice. The typical model is: the acquirer absorbs the target company’s core team as a whole with higher salaries and signing bonuses, while acquiring the target company’s IP and customer resources at a lower price (or through debt assumption).

Practical point: The legal basis for the team acquisition priority lies in the principle of freedom of contract under the Contract Book of the PRC Civil Code. The investor may stipulate in the investment agreement: “Upon the occurrence of a liquidation event, the investor shall have the right, within a certain period (e.g., 60 days), to seek an acquirer for the company’s core technical team and intellectual property as a whole, at a price not lower than a certain percentage (e.g., 70%) of the independently appraised value, and the company and founders shall provide reasonable cooperation.” This stipulation provides a contractual basis for launching an organized team acquisition process during liquidation.

3.2 Key Elements of Clause Design

• Time-limited exclusivity period: the investor obtains an exclusive “team-search period” (e.g., 45–60 days), during which the company may not voluntarily disband the key team or dispose of core IP.
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• Employee reserve fund mechanism: reserve a portion (e.g., 20% of the liquidation property) from the liquidation property to incentivize core employees to continue maintaining the system during the transition and cooperate in completing the handover—without this mechanism, employees may resign en masse on the very day the liquidation notice is published.
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• Non-compete waiver arrangement: in a whole-team acquisition plan, the non-compete covenant between the original company and its employees may be jointly terminated by the acquirer, the employees, and the original company through negotiation, to facilitate a smooth team transition.
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• Handover period stipulation: specify the post-acquisition handover and service period for the core technical team (typically 3–6 months), and cover this portion of labor costs through a “handover service fee” paid by the acquirer.
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IV. Disposition of Data Assets—the Most Sensitive Legal Issue in Liquidation

A software company (especially a SaaS business) faces a unique and sensitive legal issue at liquidation: how should the customer data it holds be disposed of? Should this data be deleted directly, transferred to the acquirer, or sold to a third party? Different choices correspond to entirely different legal risks.

4.1 The Legal Framework for Data Disposition

Data disposition involves the intersection of multiple legal norms:

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• The Personal Information Protection Law: if the company processes personal information, it must comply with the deletion obligation under Article 47 of that Law at liquidation, or meet the portability right requirement under Article 45 by transferring personal information to another processor designated by the customer. Personal information may not be transferred to the acquirer without the consent of the data subject.
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• The Data Security Law: Article 21 requires the establishment of a data security management system, and the destruction and transfer of data must follow the prescribed procedures.
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• Customer contractual obligations: most SaaS service agreements contain data processing clauses, and the company still bears a contractual obligation to protect customer data at liquidation.
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4.2 Practical Paths for Disposing of Data Assets

Disposition Method	Legal Requirement	Practical Operation
Deletion	Article 47 of PIPL	Safest, but the value of the data assets is entirely lost
Transfer after de-identification	After deletion of personal information, the remaining data may be freely transferred	Requires professional de-identification, and the value is significantly downgraded
Wholesale transfer (including personal information)	Customers must be informed and consent obtained	Maximizes value, but the operational cost is high
Entrusted processing as a transition	Article 21 of PIPL	Used as an interim solution, in coordination with subsequent decisions

It is recommended to preset a data disposition plan in the investment agreement: when the company enters liquidation proceedings, it should, simultaneously with issuing the liquidation notice, send a data disposition notice to all customers, providing a reasonable period (typically 30–60 days) for customers to choose data export or deletion.

V. Disposition of Source Code at Liquidation—the Most Core yet Most Thorny Stage

Source code is the single most valuable asset in a software company’s liquidation, and also the hardest to dispose of. Its disposition determines the amount of liquidation value and the extent to which the interests of creditors and shareholders are realized.

5.1 Three Models for Source Code Disposition

Model 1: Wholesale Sale

Selling the source code as an intangible asset to a third party as a whole (typically a competitor or an upstream/downstream enterprise). This is the value-maximizing approach, but it faces three obstacles: (1) scarce buyers—finding a buyer willing to bid is itself difficult; (2) price bargaining—the buyer, knowing the company is in liquidation, will take advantage of the situation; (3) IP risk—the buyer worries about third-party claims in the code (such as the open-source license or outsourced IP issues mentioned above).

Model 2: Open-Sourcing

Publishing the source code under an open-source license, so the company ceases operations but the code survives in community form. This primarily applies to companies with technical brand value—after liquidation, it transforms into a maintenance project of an open-source foundation. For example, Netscape gradually declined after being acquired by AOL in 1998, but its code has survived and propagated to this day in the form of the Mozilla open-source project. This model generates no direct cash flow at the liquidation level, but may preserve brand value and subsequent commercialization opportunities.

Model 3: Closed Escrow

Entrusting the source code to a third party (such as a law firm or a code escrow institution) for closed custody, with an agreement to release it to a specific entity upon certain future conditions (such as an acquisition, a new financing round, or the realization of a creditor’s claim). This model is usually an interim solution for a wholesale sale or team acquisition. Under the framework of Article 236 of the newly revised Company Law, the liquidation group should inventory, appraise, and dispose of the source code as part of the company’s property.

5.2 The Source Code Valuation Dilemma and Ways to Solve It

The biggest difficulty in liquidating a software company is: how much is the source code worth? Traditional asset valuation methods often fail in the software industry:

• Cost approach (replacement of development cost): valuing based on the labor hours and cost required to redevelop equivalent code. But the flaw of this method is that—a software company’s seven years of iterative development include a great deal of trial-and-error and business customization, and redevelopment would not need to take those detours.
• Income approach (discounting of future earnings): valuing by discounting the future earnings the code is expected to generate. But the company is already in liquidation, so the assumption of future earnings is itself highly uncertain.
• Market approach (comparable transactions): valuing by the price of similar code transactions in the market. But the software market lacks sufficient comparable transaction data, and the uniqueness of each code base makes comparability itself doubtful.
  

In practice, it is recommended to adopt a “earnings-anchored plus floor-price” dual-track valuation mechanism: preset in the investment agreement a minimum sale price for the source code at liquidation (e.g., not lower than 20% of the most recent round’s valuation), while agreeing to preferentially attempt to solicit quotes from at least three potential buyers through a bidding process, so as to raise the realization price.

VI. Special Design of Investors’ Liquidation Preference—Software Industry Version

Based on the above analysis, the liquidation preference clause of a software company needs to add the following special designs on top of the traditional template:

6.1 IP Realization Priority

“Upon the occurrence of a liquidation event, the liquidation group shall, within 60 days, engage an appraisal institution qualified for securities and futures business to independently appraise the company’s intangible assets such as source code, algorithm models, and software copyrights. After deducting the relevant liabilities, the appraised value shall be distributed as part of the liquidation property in the statutory order and according to the agreed priority.”

6.2 Team Integration Realization Right

“Upon the occurrence of a liquidation event, the investor shall have the right, within 45 days, to seek a whole-team acquisition opportunity for the company’s core technology and product team. If a whole-team acquisition plan is reached within this period, the portion of the acquisition price attributable to the company (after deducting reasonable amounts to incentivize employees) shall be included in the liquidation property. The company’s founders and management undertake not to exercise the power to disband the team during this period, and to cooperate with the investor in completing the team transition arrangements.”

6.3 Code Closed-Escrow Right

“If the company enters liquidation proceedings, the liquidation group shall, within 15 days after its formation, submit the company’s entire source code (including the complete git history) to a third-party law firm jointly designated by the investor and the company for closed escrow. The escrowed code may not be destroyed, tampered with, or disclosed without authorization, and its disposition requires the investor’s written consent.”

VII. Risk Warnings

1. Risk of disputes over the scope of liquidation property: if there are ownership disputes over IP before liquidation (e.g., a founder’s or a departed employee’s code contributions have not completed the ownership assignment), after entering liquidation proceedings these disputes will seriously hinder the realization of assets including IP. It is recommended to conduct comprehensive IP due diligence on such ownership issues in each financing round.
2. Risk of value destruction from team disbandment: when a software company enters liquidation proceedings, employees may resign en masse within an extremely short time, leaving the source code as “an inheritance no development team can read.” An employee transition incentive plan should be formulated before the liquidation notice is published.
3. Risk of unlawful data disposition: transferring or selling customer data during liquidation without lawful procedure not only faces administrative fines under the Personal Information Protection Law (up to RMB 50 million or 5% of the prior year’s revenue), but may also trigger class-action lawsuits by customers.
4. Tax risk in the liquidation distribution order: the realization of a software company’s intangible assets may involve VAT, enterprise income tax, etc. The liquidation group should communicate with the tax authority in advance to confirm the tax treatment model for intangible assets (taxed as technology transfer or as asset disposition).
5. Risk of judicial support for liquidation preference: although the newly revised Company Law allows shareholders to agree in the articles of association to distribute remaining property other than in proportion to capital contributions, judicial practice has become increasingly strict in reviewing “liquidation preference” clauses; it is recommended to include a “reasonableness” explanation in the clause—explaining why the investor should receive priority distribution (e.g., stating the investor’s special contribution to and special risks borne in the company’s development).
   

VIII. Action Recommendations

1. Conduct IP due diligence immediately: regardless of the company’s current operating condition, a lawyer should be promptly engaged to ascertain the status of the company’s IP ownership, retroactively sign any missing IP assignment agreements, complete software copyright registration, and eliminate ownership disputes that may erupt at liquidation.
2. Complete an open-source compliance scan: use open-source license compliance tools to comprehensively scan the code base, identify all open-source dependencies and their licenses, and formulate a risk mitigation plan.
3. Revise the liquidation clause in the investment agreement: in the next financing round, incorporate the software-industry-specific liquidation clauses described in this section (IP realization priority, team integration realization right, code escrow right) into the SPA and SHA.
4. Formulate a data disposition contingency plan: even if the company currently has no liquidation plan, it should formulate a data disposition contingency plan and stipulate the data processing method at liquidation in its customer service agreement; this is a preemptive compliance measure to reduce future risk.
5. Establish a “single-point-of-failure prevention” mechanism for code and documentation: ensure that core technical knowledge does not depend on any single developer—establish mandatory code review, technical documentation archiving, and knowledge-sharing mechanisms to reduce the risk of knowledge loss caused by an individual’s departure.
6. Update copyright registrant records regularly: update the copyright registrant information of the company’s code base every six months, to ensure that all substantive contributors have signed IP assignment agreements.

Disclaimer

This article is for general reference only and does not constitute legal opinion or advice. For specific legal issues, please consult a professional lawyer. The cases in this article are adapted from real events, and the company names and details involved have been anonymized.

Lawyer Kevin Jun Lin

Senior Corporate Lawyer · Industry Legal Practice Expert

💬 Feel free to share your views and reasoning in the comments

About the Zhenpin Lawyer Team

Lawyer Kevin Jun Lin — Today’s Author Currently a doctoral candidate in civil and commercial law at China University of Political Science and Law. Combines deep theoretical knowledge of company law with extensive practical experience, specializing in company law, shareholder disputes, corporate compliance system building, data compliance, and product quality disputes.

Lawyer Yan Ge: founding partner of the law firm, with decades of frontline legal experience, possessing hands-on practice across the four dimensions of courts, supervision, justice, and enterprises.

Lawyer Lin Bing: 27 years in practice, with a dual background in law and finance, having handled over 2,000 litigation and non-litigation matters.

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Further Reading

• Expanded Non-Compete in Software: What Can You Do When a Departing Programmer Contributes Code to a Competitor on GitHub?
• Data Asset Ownership: Who Owns User Data — the Founder, the Company, or the Investor?
• Investor Special Rights (Software Edition): 5 Special Rights Investors Must Secure When Investing in Software Companies
• Technical Debt Disclosure: When Due Diligence Reveals Your ‘Perfect System’ Is Actually Legacy Code
• Key Personnel Lock-Up Clauses: The CTO Leaves and Valuation Halves — How to Bind Core Team Members
• ESOP Design for Software Companies: Why Give Programmers 10% Equity? Talent Is Productivity

If you need professional support with shareholders’ agreements, investment term review, or shareholder disputes, please contact Lawyer Kevin Jun Lin (Shenzhen Corporate Lawyer) for a one-on-one consultation.