Navigating the world of SaaS agreements can feel like making your way through a maze…in the dark…all alone…blindfolded!
But drafting and negotiating effective SaaS sales contracts doesn’t have to be overwhelming!
We’re here to lead the way and guide you through the process step-by-step with our 2022 ultimate guide to SaaS Agreements.
We’re going to explain what SaaS agreements are all about:
- why you need them
- what’s in it for you and your customers
- what SaaS agreements need to contain
- deep dive into the top 10 SaaS contract terms
And of course, we’ve got pro tips for you to draft the best SaaS sales contracts to get your customers signed up whilst protecting your business interests.
If you’ve mastered the 7 stages of your SaaS sales cycle and made the sale – the last thing you want to do is fall at the final hurdle!
So let’s get into our ultimate guide for SaaS agreements!
What is a SaaS Agreement
Let’s get one thing straight. A SaaS agreement is simply a document that governs the relationship between you and your customers.
Without stating the obvious, when your customers sign up to your SaaS product, they’re not actually buying your software, but paying for the right to access via the cloud.
A SaaS contract clarifies the access to your software that your customers receive when they subscribe to your service.
The agreement provides a framework for the relationship between you and your customers, together with certainty and legal accountability on both sides.
For your customers
For your customers, your SaaS agreements play a key role in making sure they know precisely what your product provides, the features they’ve signed up for, the level of service they can expect and the subscription fee agreed between you.
The SaaS contract also highlights your customers’ rights and responsibilities, the remedies available to your customers should something go wrong on your end and the ways in which your customers can get out of the contract.
For you, the SaaS agreement clarifies the ways in which your customers are prohibited from using your software, the remedies available to you should something go wrong on the customer’s end and the all important limitation of liability in cases such as intellectual property infringement and data breach.
Sound a little complicated? Don’t worry – we’ll be going into all of these concepts in detail!
Quick tip before we get started!
SaaS terms can have different meanings to different people, depending on their experience and their industry.
Defining terms at the beginning of the agreement is essential to ensure that the parties entering into the agreement are 100% aligned.
Once defined, the SaaS terms should be used consistently throughout the agreement, avoiding synonyms, “legalese” or industry slang.
SaaS contracts can vary depending on your industry, your product and your customers. But the crux of a SaaS agreement pretty much stays the same.
We’ve set out everything you need to know about the top 10 SaaS agreement terms.
And if you want to know how to negotiate your SaaS contracts like a Pro – click to read here!
Top 10 SaaS Agreement Terms
1. Scope of use
One of the most important aspects to understand about SaaS contracts is that the license your customers get is for your services, not your software!
To make this clear to everyone you’ll see a “scope of permitted use” clause that defines and limits the rights transferred to your customers when they sign up for your service.
SaaS contract permitted use provisions typically include:
- The SaaS services: a clear identification of the specific service applications that your customers may use
- License scope: the precise rights and limits your customers get
You could argue that pricing is one of the most important SaaS agreement terms and a huge area for negotiation in B2B deals.
SaaS typically runs on a subscription model where your customers pay on a regular basis for continued use of your product.
Your SaaS contract should detail the prices agreed on and how and when those costs will be charged.
Some companies, like Adobe, offer monthly and yearly subscriptions, whereas other SaaS services allow customers to pay as they go, only paying for the software when they use it.
Pro tip: You can work together with your customers to optimize their SaaS plan, lowering customer acquisition costs (CAC) and increasing customer lifetime value (LTV) through higher prices and better retention rates.
SaaS payment terms usually include the following:
- The type of subscription pricing model: a description of one of the top 8 SaaS pricing models in use today
- The tier of the subscription
- The payment schedule with recurring billing on a monthly or annual basis
- The amount the client is expected to pay each billing cycle
- How the services will be delivered to the client
3. Term, Termination and Renewal
These terms govern the duration of the agreement between you and your customers, and how the agreement can either be ended or renewed.
- Term: the period of time, from the date of signing, that the contract is in effect.
- Termination: your customer’s right to end their subscription and a statement of what will happen if they do.
- Renewal: a statement that the contract will renew unless you and your customer terminate, and a description of the process of auto-renewal.
Pro tip: Make sure to include an Automatic Renewal clause. It is a term that’s often missing but has become the market standard. This term stipulates that if the customer does not terminate the contract before a specified date, the agreement will automatically renew.
4. Limitation of liability
Most B2B SaaS companies require some sort of cap on the liability they will incur if something goes wrong.
For SaaS companies with a large customer base it’s important to manage your risk and limit the liability you have to each individual customer.
There are two limitations of liability that you’ll commonly see in SaaS agreements:
- Special (indirect) damages liability limitation
- Aggregate liability cap
Special damages are simply ‘indirect’ losses that could not have been ‘foreseen’ at the time of the event. These losses can include loss of profits, loss of opportunity and loss of reputation.
It’s not reasonable to expect you to be liable for these kinds of losses, as they are a long way downstream, with very little visibility or foresight on your part.
Pro tip: Make sure you exclude liability for special damages as they can quickly add up. For example a loss of $5m in profits that resulted indirectly from a temporary breakdown in your software.
Aggregate liability cap
Most B2B SaaS companies require some sort of cap (in dollars) on the liability they will incur if something goes wrong.
Without these limits, companies would need to price their products much higher to guard against the greater risk of uncapped liability.
Pro tip: The market trend is to tie this aggregate liability cap to the fees that your customer pays over a period of time – such as 12 months of fees for your product.
It’s vital for the ongoing solvency of your business that these two key areas of liability are sufficiently excluded and restricted.
5. Data ownership
Cloud-based applications host a huge amount of data, so it’s really important for SaaS contracts to contain provisions that clarify who owns the data uploaded to your service.
The contract has to stipulate who owns what data and what rights you’ll need in the data that is provided to you.
We’re talking about informational data that might be stored on the platform, inputted into the platform or generated as a result of your customer’s use of the platform.
Pro tip: If you want to be able to aggregate and analyze the data you collect from the platform in order to optimize your product, you’ll need a clause to reflect this.
Data security provisions usually include the following:
- Data protection procedures: your responsibilities when it comes to the encryption, processing, storage and security of data.
- Customer compliance: the responsibilities on your customers when it comes to the encryption, processing, storage and security of data.
- Security breach protocols: what happens to the data in the event of cybersecurity leaks, attacks or other forms of security breach.
- Return of data: what happens to the data in the event of termination of the contract.
Privacy is closely linked to data ownership.
You’ll need to consider what personal information is attached to the data being input by your customers, and how you’re handling the storage of that information.
- how you are using the information collected
- the extent to which you are permitted to share that information internally or with third parties
- the extent to which you are permitted to transfer that information overseas
- how the personal information is collected, stored, backed up and encrypted
- the security measures you have in place to protect your customers’ personal information
- your role and processes in place in the event of a privacy breach or security issue.
a) that you’re not going to use the data for any purpose other than the primary purpose for which it was collected, and
b) that you’re not going to use the data for any purpose without the consent of your customer.
7. Intellectual property
Intellectual Property simply refers to creations of the mind and there are 4 main types: patents, copyright, trade secrets and trademarks.
In terms of your SaaS, your IP will include all of the code relating to the operation of the platform as well as the branding, layout and look and feel of your platform.
This is what makes your business unique and where the value of your business can be found – so it’s really important to keep it protected!
As the owner of your IP, you get to choose who can benefit from it and put in place key restrictions around usage.
When your customers subscribe to your product they are licensing the IP rights to the software from you. So the first thing your SaaS agreement must do when it comes to IP, is set out that you own the IP and that you are licensing it to your user on certain conditions.
These conditions include:
-that the fees are being paid
-that only authorized users are granted access
-that there is no interference with the platform
-that there are no attempts to resell, or any other breach of the IP.
Pro tip: Insofar as IP belonging to the customer is uploaded to the platform in the form of documents, images or branding – a second clause is required to grant a license from the customer back to you to be able to use that content for the purposes of providing the SaaS.
When it comes to new IP that’s created through the use of your SaaS – for example a virtual garden is created on your platform from images uploaded by your customer. The contract must make clear who retains the rights to the IP.
In this scenario, there is no clear right or wrong in terms of your SaaS agreement. Issues like this come down to a commercial decision guided by your industry, product and relationship.
A warranty is simply a promise you make about how well your product works.
Some B2B SaaS products like Salesforce or Google’s Firebase offer no warranties at all. Whilst other SaaS providers offer some degree of warranty because their customers demand them.
It’s important to look at what is market standard and what is an appropriate or reasonable level of service to provide.
There are a lot of external factors at play when it comes to providing SaaS via the cloud. If something goes wrong, these SaaS contract terms can become pretty important so it’s key to strike the right balance when drafting your SaaS agreement.
9. Service Level Agreement (SLA)
A SaaS Service Level Agreement (SLA) can be a stand-alone document or a section of your SaaS contract that expands on the Warranties.
The purpose of an SLA is to provide certainty over the level of service you provide to your customers; in particular – service availability.
The danger here is that the more “certainty” you provide, the more you open yourself up to liability exposure.
You don’t want to promise the SaaS will be available at all times, 24/7, every day of the year, because there are factors outside of your control.
Pro tip: Make sure that any service level guarantees you provide are reasonable and that you’re confident you can meet them.
Including ‘carve out clauses’ relating to software issues such as downtime is fundamental. So that if the entire network falls down it doesn’t count against you from a service level perspective.
SaaS Service Level Agreements typically cover:
- The specific services and capabilities your SaaS product provides
- Key Performance Indicators, Metrics and other ways in which the quality of those services can be measured
- Response times for time-sensitive issues, general support and requesting additional functionality
- Guaranteed software uptime
- The penalties to be levied against you if those guarantees are not met
- Exclusions for which you will not have to pay those penalties or be responsible in any way for software maintenance
- Billing and pricing structure
- Security and compliance
A comprehensive Saas Service Level Agreement can be a selling point as quick response times and high availability are valuable to potential customers.
However, negotiating long and complicated SLAs can seriously draw out the negotiation process when in reality, your customers may agree to more general promises about your product’s performance.
It’s all about striking the right balance, and tuning into the market standard as your gauge for buyer expectations.
The difference between an indemnity and a warranty in the context of SaaS is that a warranty is something you give to your customers directly, whereas indemnities cover your customers’ potential liabilities to third parties.
Indemnity clauses represent a promise from you to your customers to compensate them from the risk of harm, liability or loss – a lot like insurance.
Pro tip: Make sure to include a statement that your customers must indemnify third parties for damages resulting from their own negligence, misconduct or breach of the agreement.
Instead of thinking of SaaS contract negotiation as one party “wins” and the other “loses,” the best SaaS negotiations are a collaborative effort to get the deal done. Not to mention that it’s in your long term interest to ensure your customer’s needs are met from the outset.
If you want to get your SaaS contracts signed, you’ve got to focus on what’s standard in the market.
But why? I hear you ask.
The market standard will determine what is fair for both parties and what is most likely to be agreed on. So it’s important to tune into the market standard and create SaaS contracts that reflect the expectations currently within the market.
We know how important it is to balance the needs of your customers with protecting your business interests.
So we set out to build a contract and negotiation solution that uses a data driven approach to align your contracts with market standards.
At Superlegal we help you speed up your SaaS contracts faster and cheaper than any lawyer.
With Superlegal you’ll get your contracts back in up to just 24 hours at 10% of the cost of a SaaS lawyer – so you can get back to growing your business!
Click here to try Superlegal completely for free!