Software-as-a-Service (SaaS) products have become a staple of modern business. In fact, you'd be hard pressed to find an organization that doesn't rely on at least one SaaS platform as a core part of their business. 

However, SaaS agreements differ significantly from traditional software sales agreements. Unlike software installed locally on office computers, SaaS platforms exist in the cloud and require an on-going subscription for customers to maintain access. 

That represents a major change in how SaaS agreements are structured. 

Whether you're a SaaS vendor bringing a product to market, or a business evaluating a new platform, understanding how Software-as-a-Service contracts work can help you enter into stronger agreements and minimize potential disputes.

What is a SaaS Agreement?

SaaS is a business model that delivers a software product to customers over the internet, on a subscription basis. Instead of owning the software outright, a SaaS licensing agreement defines how a customer accesses the software, their payment terms, how data is stored and controlled, along with other key provisions.  

That is a big departure from the way traditional software sales agreements worked. 

In the old software licensing models, a business would purchase a perpetual license to install and use the software on its own machines. They might pay for a specific number of “seats”, or licenses, for their employees to be able to access the software, but they essentially owned the software with a single purchase. 

SaaS software license agreements turn that model completely around. Because the software is sold as a “service”, users only maintain access as long as the organization continues to pay for it each month.  

The SaaS platform itself is hosted, maintained, and delivered by the vendor, using cloud-based technologies. The customer does not have to physically install the software or run updates. The platform can typically be accessed on any authorized machine, and updates are handled by the vendors themselves. 

Because of that, SaaS agreements must work as both licensing agreements and service agreements.

For both vendors and customers, a well structured SaaS agreement is the foundation for a long-term working relationship between the two parties. 

Key Features of Effective SaaS Contracts

No matter what industry you operate in, there are a few universal features of effective SaaS contracts that every organization should understand. 

1. Service Level Agreements

The Service Level Agreement (SLA) is the cornerstone of a software-as-a-service contract. It defines the minimum level of performance that vendors must meet. A common metric is uptime guarantees, for example, 99.99% availability. SLAs also put in place other performance metrics, and procedures for handling service disruptions. 

SLAs set clear expectations for both vendors and clients. The language used should clearly state what the standards for performance are, and what the available remedies are if service fails to meet the standards. 

2. License and Usage Rights

SaaS licensing agreements should include specific terms for how the customer is allowed to use the software. The number of seats allowed and limitations on data storage need to be specifically defined in the agreement. Things the customer should not do, such as resell or reverse engineer the software, must also be defined in writing.

If usage rights are vague, problems are more likely to show up later. By clearly defining what is accepted usage and what is not, you can avoid a lot of headaches later. 

3. Data Ownership and Security

Data ownership should be explicitly covered in the SaaS licensing agreement. A great deal of sensitive and proprietary data will be held by the vendor in the cloud. Clear policies for who owns the data, as well as how it will be kept private and secure are essential. Not only for operational trust with clients, but for compliance with data privacy regulations like HIPAA, CCPA and GDPR.

4. Pricing Model and Payment Terms

Because SaaS is subscription-based, the agreement creates an ongoing relationship between the vendor and customer. Both parties should clearly understand the financial obligations of the agreement. The contract should specify the monthly subscription fee, the billing cycle (monthly, annually, or other), auto-renewal terms, upgrade and downgrade options, and any additional fees that may be applied (overage charges, premium support, etc).

Some vendors include a software sales commission agreement that is often connected to the payment terms. The terms of any commissions should be specified in the agreement. 

5. Termination Clauses

A SaaS agreement should outline the duration of the contract, including auto-renewal terms. Vendors often use auto-renewal terms as a way of securing predictable recurring revenue, but customers should have a way to opt out with notice. 

There should also be mechanisms for termination, such as unauthorized usage, or insolvency. Vendors should define accepted usage as well as unauthorized conduct that can result in termination of the agreement. 

Clauses that define responsibilities when the relationship ends, such as data return or deletion, are important. Defining termination clauses protects each business from misuse and failure to pay, and helps relationships end smoothly when the time comes. 

6. Indemnification and Limitation of Liability

SaaS software license agreement should include indemnification clauses to protect each party if unforeseen problems occur. Indemnification clauses can help a party recover specific losses or damages when there are intellectual property infringement claims related to the software, or protect a party when the other has misused the service or data. 

Limitation of liability clauses are also used to put a cap on the amount of damages that either party can be held responsible for. These clauses can protect parties from gross negligence or willful misconduct, and limit financial exposure from legal claims, service failures, or unintended consequences of a software's use. 

7. Support and Maintenance

SaaS contracts should set an expectation for the level of ongoing support that a client can expect. Otherwise, clients might assume they are entitled to more support than the vendor will actually provide. Clearly defining the support hours, response times, software updates, and new feature releases avoids these problems. Vague support clauses often lead to unhappy customers who expect more than can be realistically provided.

Why Legal Counsel is Needed Before Signing a SaaS Licensing Agreement

SaaS contracts are considerably more complex than software sales agreements. Whether you're licensing your SaaS platform, or signing a contract to bring a new tool into your organization, having legal counsel draft a SaaS contract holds several advantages.  

The biggest is that it avoids using generic online contract templates that don't account for the specific risks you face. Generic SaaS contracts lack specificity. They can leave you vulnerable to unauthorized usage, intellectual property theft, unexpected liabilities, or unfavorable termination clauses. 

A lawyer will ensure compliance is built into your agreement. SaaS platforms hold huge volumes of data in the cloud, and compliance with data privacy laws like CCPA, GDPR, HIPAA and other industry specific legal requirements is essential. A technology lawyer will review your SaaS licensing agreements to ensure they comply with these regulations. 

A well structured SaaS agreement should protect your interests. Without legal help, you run the risk of accepting unfavorable terms, waiving critical rights, or even compromising your own intellectual property and revenue potential. 

Professional legal counsel also helps with negotiation. They will help you identify your leverage points, anticipate potential problems, and negotiate favorable terms. A lawyer will also help you optimize pricing structures and safeguard your intellectual property.

Don't Risk Signing a SaaS Licensing Agreement Without Legal Counsel

Software-as-a-Service has dramatically changed the way businesses use software. It has also increased the complexity of software sales agreements. 

Signing a SaaS agreement without the help of a lawyer creates a huge risk. You need experienced legal counsel from an attorney who not only understands the challenges of today's business technology, but also excels at negotiating complex software-as-a-service contracts.

At SVTech, we pride ourselves on being a trusted legal partner to technology companies and SaaS developers. We help our clients draft robust, scalable, and legally sound SaaS sales agreements that protect their valuable intellectual property, ensure compliance, and establish strong, mutually beneficial contracts. 

Before you sign a SaaS contract, have a lawyer walk through it with you. The risk of a bad agreement is too great to move forward without a legal professional's input. 

Contact SVTech today, and let us help you ensure that your SaaS contract represents the best opportunity for your business. 

Disclaimer

***The information provided in this blog post is for informational purposes only and does not constitute legal advice. Please consult with a qualified attorney to address your specific legal needs.***