A SaaS agreement is an essential business document which includes the terms and conditions of your service. It outlines your unique offerings, rights, responsibilities, and obligations to your clients and customers, and vice-versa. It essentially formalizes the relationship between you and your userbase.
However, since it serves multiple purposes, the information required can get confusing. And that’s why we’ve stepped in to help. At Founderpath, we strive to help SaaS founders like you succeed. In addition to providing finance to bootstrapped SaaS Founders, we offer excellent business advice.
This comprehensive guide to SaaS agreements helps make the particulars more transparent. We’ve cleared up the SaaS agreement and software License confusion and explained the critical information that should be included in your SaaS agreement.
Plus, how to write your own! So let’s get into it!
What Is a SaaS Agreement?
A software-as-a-Service agreement explains the terms and conditions of the software delivery model. SaaS agreements cover the technicalities of pricing, subscription renewal and cancellation, data privacy, and much more legal stuff that we’ll discuss later. Overall the document clarifies how the software provider and customer relationship, service commitments, and party responsibilities will be regulated.
Types of Agreements SaaS Companies Need
- Company-level agreements: can include employment, shareholder, and non-disclosure agreements.
- Customer-facing agreements: may include purchase and sales order agreements, service level, and master services agreements.
- Third-party agreements: these can include contractor and advisor agreements.
- Public–facing policies: these may include trademark, privacy, and security policies.
What Is the Difference Between Software License and SaaS Agreements?
SaaS services are often referred to as licenses, which may cause some confusion. Knowing the difference is crucial in drafting a solid software contract. To clear things up, first, let’s be clear on what a software license is.
A software license is an agreement between the software owner or developer and the customer. It lays out how the product can be used and distributed.
In a software licensing model, the company delivers a single piece of software via a CD or website to be downloaded and installed by the customer(s). Traditionally, the customer is charged once for lifetime ownership, or they may need to pay an initial fee and then make regular payments towards a subscription plan.
The software is distributed to the customer as a tangible product –as opposed to a subscription service offered by SaaS companies.
Software Licenses vs. SaaS Agreements
The key difference is both documents are based on various technology models. Although the legal concepts remain similar, the details are different. The information included must be appropriate to tangible software or hosted software.
Based on the fact that the software will be downloaded or installed locally on the customer’s device, network, or platform, here are some characteristics of a software license.
- It outlines intellectual property interest: when a software license is used, the software developer company maintains an interest in the intellectual property, like copyrights, patents, and other associated rights.
- It consents to rights in restricted use: which can be exclusive or non-exclusive. In addition, limited to things like the geographic region, storing and making copies, and the permission to transfer and sublicense.
Other areas addressed in a software license include maintenance, hosting, and technical support. Technical support, for example, may be free for a year and then charged after that.
On the other hand, the SaaS agreement is centered around clauses for remote software access. For example, maintenance, hosting, and technical support are automatically included. Technical or customer support is usually included in a subscription plan.
SaaS agreements explain things like the services provided, pricing structure, and data security.
Why Is a SaaS Agreement Important?
Clarifies Software Access and Accountability
Once your customers have subscribed to your service, the SaaS agreement outlines their software access. It confirms details like the subscription plan, their rights and obligations, and subscription payment details.
A SaaS agreement is a legal document laying out your contractual obligations to your customers. It will clarify service level agreements and how data will be collected, used, and destroyed.
Offers Company Security and Protection
In addition to outlining how the service should be used, it explains how it should not be used. What is prohibited and deemed illegal behavior? For example, you may not allow it to be shared or used to facilitate fraudulent activity.
And to protect yourself against data breaches, a clause can be included to limit company liability. Such terms protect your company from losing customers and money due to evitable hackers or piracy.
How to Create a Saas Agreement
Step 1: Establish Your Agreement Terms
Deciding whether the terms should be fixed or monthly will be the first step to writing your SaaS agreement. The difference is you can secure an upfront payment or direct debit guarantee with a fixed term. With monthly terms, you’ll receive monthly payments, and you can restrict the service if payment is not made.
Step 2: Provide a Clear Description of the Subscription Plan and Services
Specifying the subscription plan, model, and the services is essential. You could include a detailed description of your services in the agreement, or point your clients and customers to the service information on your website. Either way, the goal is to ensure your client understands and agrees to the services they’ll be paying for.
Step 3:Discuss the Support and Maintenance Details
You’ll need to include support and software maintenance details. Specify how you intend to carry out upgrades, fixes, and general platform maintenance. When outlining your planned maintenance times, be clear on the time zones for your customers accessing from different countries.
Step 4: Data Use and Data Security
The Consumer Privacy Act states that customers must be made aware of the type of personal information that will be collected about them. Your SaaS agreement must specify how you intend to use your customer’s data and data security. The details may cover:
- encryption responsibilities
- security of data entered
- data back-up frequency
- protections offered
- data storage
In addition, clarify how you’ll handle events like bankruptcy, a security breach, and termination of service use.
Step 5: Preserve Your Proprietary and Intellectual Property Rights
To protect yourself against theft or piracy, you must explicitly state that you retain your service’s proprietary and intellectual property rights. This covers things like software ownership and intangible property, like copyrights.
Detail new intellectual property as a result of any software changes or improvements.
Step 6: Reduce Your Liability
Use a clause to ensure you have limited liability to your clients and customers. This reduces your exposure to consequential, indirect, and economic financial risk. If there are financial risks you do not want to be liable for, explicitly state them in your agreement. It should cover problems such as:
- the amount of liability accepted and denied
- the types of loss covered by your company
- liability with third-party websites
Essential Clauses and Terms to Include in Your SaaS Agreement
- Start and end dates: the start or effective date is when your SaaS agreement officially starts. The subscription is available for your clients to use at this point.
- Pricing and payment schedule: the payment terms outline how much they need to pay, the method used to make payments, and how often. Are you expecting a one-off, monthly, annual, or semi-annually subscription payment? Or is there a multi-year arrangement in place like biennially (every two years)? This information should be specific, as many disputes stem from the pricing.
- The term, cancellation, and renewal terms: this describes the subscription period, the cancellation methods, term renewals and amendments, and penalties. Generally, SaaS agreements will have an evergreen renewal, meaning the Contract gets renewed automatically for a new term unless the client terminates it before the end date.
- Warranties: these are the performance goals, the service delivery method, uptime, and guaranteed minimum performance. And any results not delivered by your service.
- Service-Level Agreement (SLA): the SLA terms include solutions or penalties for downtime. This can include compensation or how you intend to limit the impact any service disruption has on end-users.
- Customer service and support: how your customer will be supported, e.g., live chat or email; the customer response times; and other guarantees concerning expected service.
So what about the language?
Legal agreements, in general, do not need to include complicated verbiage. However, some standard phrases or words should be included to avoid confusion and ambiguity.
For example, provide the full names of all parties involved at the start of the agreement. You could start this section with a sentence: “The parties agree as stated….” This lets the reader know that your agreement terms are outlined next.
Ready to Write Your SaaS Agreement?
Although writing your own SaaS agreement may sound like an epic task, a general understanding of what’s required makes things easier. And the great news is, anyone is allowed to draft it.
You could always ask a tech lawyer to review it after for reassurance. This option is much cheaper than having them write it from scratch, and gives you the chance to understand your terms and conditions thoroughly as you’ll need to go through everything with a fine tooth comb.
For cash-generating options, Founderpath provides funding for bootstrapped SaaS founders. Try us out today for free and see how thousands of bootstrapped SaaS founders are getting cash fast!