Every software as a service company is different in their needs for a SaaS contract. A lot of things can be templated but as you grow you’ll need to de-risk your company by having contracts that better align to the way you deliver your product and the way that customers use it. When you’re getting started it’s important to understand the essential things to have in SaaS contracts to protect yourself from issues with your early contracts. We’ve collated a list of ten of the essential things that you must have in your first software which is a service contract below.
Description of Software Services
Having a clear and detailed description of the SaaS services being provided to the customer is essential to describe what you, as a company will be providing. This is often very important in the early stages of your startup because a lot of software companies that sell to enterprises will start by selling both their product and professional services. It’s important to have a clear definition of what those professional services entail so that they are deployed at the appropriate level.
Term of SaaS Contract
Every SaaS contract should have the start and end date of the agreement and any renewal options. The start and end dates should adhere to the dates that the customer gets access to your platform and the dates that you recognize their revenue. Often, as default, SaaS contracts are one-year contracts. Auto-renewal causes are common on smaller SaaS contracts (below USD 10,000) but are often not entirely enforceable. For example, if your contract states that it will auto-renew if the customer doesn’t inform you of non-renewal thirty days before the end of the contract and they do not inform you, you can invoice them but the auto-renewal does not constitute a contract. It’s more of a convenience, a reduction of work mechanism. Often for contracts that are multi-year customers might try to negotiate break clauses at the one-year mark of the contract.
SaaS Contract Payment Terms
Every contract should always have the payment amount, frequency, and due date for the SaaS services. There is very little that can be standardized here when you are selling to large enterprise companies. Often as a small startup company, you’ll be at the whim of enterprise customers when it comes to frequency and due date. Several large enterprise customers force suppliers into 60 or 90-day terms. The difficulty with these terms is that often they are triggered on delivery of an invoice with a purchase order number on it. And even after signing a contract an enterprise customer can take time to raise a purchase order number. This is important to keep in mind for cash flow.
SaaS Contract Service Level Agreement (SLA)
Every SaaS company should have a standard service level agreement embedded in their contracts. The service level agreement will define the uptime of the product the actions that will be taken and remedies that are in place if this uptime is breached. Common tiers are 99%, 97%, and 95% uptime with remedies including weeks or months of refunds/credits.
The agreed-upon level of service generally also includes response times for support and maintenance. Attached to each level of downtime will be the support and communication levels expected of the SaaS company’s service team which includes turnaround time for fixing the breach.
An important consideration to keep in mind with service level agreements is that they generally do not include planned maintenance the uptime tiers will often be influenced by the level of ‘mission critical’ that the software plays in the customer’s business. For example, a productivity tool won’t have as stringent uptime requirements as an API tool that is embedded into a customer’s product as that would directly affect their uptime too.
1. Intellectual Property Rights
Setting up a clear definition of the ownership of intellectual property, including software, data, and any other proprietary information is very important for IP in SaaS contracts. One of the things to ensure you have very clearly set out here is the definitions for the work product and who owns this work product. This definition is essential for outlining what occurs after the contract ends. Does the customer own the work product and if so what is that defined as? Careful wording here is required to ensure that your startup IP is protected and none of this is transferred to your customers as part of the contract. For startups, this is one of the core essential things to have in SaaS contracts.
2. Data Privacy and Security
Data privacy and security have come into the limelight with the rise of GDPR for SaaS contracts and similar legislation in California and other states in the United States. It’s important to have a clear description of the measures taken to protect the customer’s data, including security protocols and data backup procedures. Customers will often look to get a DPA included in contracts. It’s important to understand DPAs and have the appropriate documentation ready for your team to fill out details about the tools that you use in your business that manage data and the security of those systems.
3. Limitation of Liability
A clear statement of the parties’ liability in case of breach of contract or loss of data is one of the essential things to have in SaaS contracts. This protects both parties from actions against each other that could outweigh the benefits of doing business together. Negotiating liability is often a very contentious clause in software as service contracts and as such we’ve written a few more comprehensive posts on this to cover things we couldn’t fit here.
4. SaaS Termination Clause
When and how a contract can be terminated gets bundled up into the conditions under which either party can terminate the contract, including the procedure for termination and any associated fees. A lot of standard SaaS contracts have clauses that allow customers to terminate based on a material breach or if they no longer require the product. As standard SaaS contracts generally do not allow refunds in the case of a termination. This is because SAAS contracts are often paid upfront annually and the revenue is already recognized and reported so avoiding refunds is important for SaaS startups. In saying that customers will look to negotiate refunds into termination clauses and it is a commercial decision to allow this or not.
Dispute Resolution is one of the essential things to have in SaaS contracts
If something goes wrong, every contract needs a method for resolving disputes, such as arbitration or mediation. Dispute resolution will often be defined in several ways and it will also define the materiality of what constitutes the invoking of these dispute resolution clauses. The materiality is the level or type of contract breach that must occur before dispute resolution becomes an option. This may be a continued SLA breach, IP breach, attempt to transfer contract delivery to a different party, or several other things.
Contract Governing Law
Setting the governing law that will be used to interpret the contract and resolve any disputes is an important part of SaaS contracts. To de-risk your contracts you should look to have the governing law be situated in the primary place that you do business. This will more often than not be different than the place where your customers do business. The difficulty here is that you open yourself up to risk if anything ever happens and you face legal action in multiple regions, legal costs will soon sink your startup. Always look to negotiate this clause to give you home field advantage, but in saying that, it is often very difficult to get enterprise companies to budge on this and change from where they want to have the governing law.
