SaaS Fundamentals- Key Terms for your Agreement

Posted by Tom McKeever | Jul 27, 2020 | 0 Comments

Before you can offer SaaS services, you need a SaaS agreement.  This document will spell out the terms and conditions for how your customers will and won't use of your service. SaaS is markedly different from the old business model of perpetual on-prem software licensing. As a result, you and your legal team will need to address the issues that arise in a SaaS customer relationship in this document.

Why SaaS Agreement Fundamentals are Important

An almost infinite combination of SaaS agreement terms exist. This article points out some but certainly not all issues you need to consider.  In some ways, the SaaS agreement is a compressed description of your business.  What customers get from you, how you capture that value and how you resolve legal issues unique to your business. For this reason, your own SaaS template implementation will take on the unique contours of your business. But, considering the four basic items discussed below will help you start to think through important basic, strategic and tactical considerations.  Do this right and your business will be more successful.  But if you don't put in the necessary time and thought, you will leak revenue, have longer negotiations and leave significant money on the table.

1. Service Descriptions

You need to describe the services that you will provide to the customer, along with the compensation that you will receive for your services. This mutual exchange of promises will support the remaining terms of the agreement.

In describing your services, you should consider:

  • Specificity: Some SaaS providers choose to describe the services in general terms because their offering is likely to change over time. A promise to provide “access to hosted software for use by the user” is usually specific enough for a valid contract. Alternatively, you can provide a specific description of your services if that approach works best for your business, although as your services are very likely to change over time you should try to maintain flexibility to make those changes.  From my vantage point you are better off keeping specifics in a separate services description at a link that you can update from time to time.
  • Term: You will usually reference the subscription term – annual, quarterly, monthly.  There are many subtle but important issues to consider here that directly affect revenue, including the appropriate length for the initial term, whether to have auto-renew, price caps and how all of these are interrelated and interdependent.
  • Fees: The agreement or a separate order form referencing the agreement should identify all fees that will be charged. The specific amounts are unnecessary in the actual SaaS agreement, but a description of the types of fees – subscription fee, annual maintenance fee, and so forth – is.  This part of your agreement (whether in the main agreement or order form) will reflect all the hard work you have done and will continue to do to develop and refine your revenue model and go-to-market plan.
  • Access: You will describe in general terms the access available to the user. The SaaS agreement typically grants a non-transferable, non-exclusive right to use the services throughout the world and states that your business will host the software; in today's world do not need to provide a physical copy of the code to the customer.
  • Limitations on access: You should consider any legal limitations you want to place on access and use. For example, you should specify that the customer is restricted from using the software for illegal purposes or accessing the software from certain countries.
  • Additional services: You should consider whether to list additional services, such as technical support, maintenance, professional services, that you will provide along with any limitations on those services.
  • Uptime and SLAs:  You need to define the hours you will provide support, how quickly you will respond to customer requests for help and limit the consequences for not living up to those promises.

If your software requires the installation of an interface or other code onto the user's device to access your SaaS product, you should consider including terms that give you the necessary permissions you need to do that.

  • Authorizing you to install the code.
  • Licensing the use of the code.

2. Limits on Customer Use

Your SaaS agreement will restrict the user from common bad behavior plus specific types of potential bad behavior that concerns you given your service:

  • Hacking or circumventing any security measures you use to protect your software.
  • Modifying or attempting to modify your code.
  • Sharing the user's login credentials to avoid paying for additional subscriptions.
  • Copying your code.
  • Creating a white-label portal to pass your code off as their own.
  • Accessing the software after the user's subscription has expired or been terminated.

If you restrict use, your SaaS agreement might also include penalties for breaching the restrictions, including termination of the user's subscription and liability for damages.

3. Warranties

Your SaaS agreement will typically disclaim implied warranties and set forth your own limited express warranty. You should carefully consider what to include in your warranty section since you will be bound by these promises. For example, promises of access, security, or functionality might be broken by forces outside your control such as malware, denial of service attacks, or even power or data interruptions.

You should also consider how to limit the user's warranty remedies. For example, many SaaS agreements limit the user's remedies to a refund of the subscription fees or service credits for downtime above a certain level.

4. Storage and Use of User Data

Proper protection and appropriate use of customer data is top of mind for many customers.  You need to have well-developed philosophy and approach ready to share with customers who are particularly focused on data use and potential abuse.  If you plan to store or use customer or their users data, even if it is not personally identifiable, you should address the following in your SaaS agreement:

  • Permission from the user to store the data and/or a representation from your corporate customer that they have secured those rights.
  • A privacy policy for the use of that data that actually maps to what you do with the data.  The worst thing to do is to publish a policy that you then don't follow.

In Summary

You will not find a one-size-fits-all SaaS agreement. Instead, it must be tailored to your services and business model. However, by referencing this article, you can identify some of the core issues that should be addressed in every agreement.

Contact us to discuss your SaaS business and the SaaS agreement.

August 2020

About the Author

Tom McKeever

Leverage Tom's deep technology law experience and solid business judgment to your unfair advantage.


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