Getting your SaaS contracts into a good shape will help you build and de-risk your SaaS business. Your SaaS contracts are the concrete legal representation of your relationship with your customers. They can help you or harm you, especially in the long run. So here are the top ten clauses to include in SaaS contracts.
Starting with SaaS Contracting
Knowing the top clauses for SaaS contracts is essential, but you must start somewhere. Build every SaaS contract to align with your business offerings and operations. One of the easiest ways to do this is start with a SaaS contract template. Once you have a SaaS contract template the next place to move it is to find an experienced SaaS lawyer. An experienced SaaS lawyer helps customize your contract template to work for your business. Work with your lawyer to cover the top ten clauses in SaaS contracts during this process.
Clauses to Include in SaaS Contracts
The Parties Involved
Parties in a sales contract refer to the individuals or entities involved in the agreement. Typically, there are two primary parties: the “seller” and the “buyer.” The seller offers goods or services, and the buyer acquires them for payment. The contract defines roles, responsibilities, obligations, and rights, covering product or service details, price, delivery terms, payment terms, warranties, and dispute resolution. Contract Sent is designed for managing contract negotiations, current stages, and responsible parties. Clarity regarding the roles and identities of these parties is crucial for a legally binding and enforceable sales contract.
Starting and Ending Dates
Start and end dates in a Software as a Service (SaaS) sales contract are crucial for revenue recognition. The start date marks the commencement of the contract, typically triggering the initiation of revenue recognition. This is particularly important to note when you go to build an MRR waterfall report. The SaaS provider delivers services throughout the contract’s performance period, recognized from the start date to the end date. Revenue is recognized proportionally based on the contract terms as services are provided. The end date marks the conclusion of revenue recognition, aligning with the termination or completion of outlined SaaS services. Accurate tracking of these dates is essential for proper revenue accounting and financial reporting.
The Cost to the Customer
The cost to the customer is generally recorded in monthly recurring revenue (MRR). MRR, a key financial metric, measures predictable and recurring monthly revenue generated by a SaaS company. It represents the total revenue a SaaS provider expects to receive from its subscription-based customers in a given month.
MRR includes revenue generated from all active customer subscriptions, taking into account the pricing plans, upgrades, downgrades, and cancellations. It excludes one-time fees like setup or consulting charges, as they aren’t recurring monthly.
MRR is valuable for forecasting revenue, assessing customer churn impact, and making informed decisions about pricing, marketing, and customer acquisition. It’s often used with metrics like CLV and Churn Rate to assess long-term sustainability and profitability.
Service Level Agreement
A Service Level Agreement (SLA) in a SaaS contract is a formal and legally binding document that outlines the agreed-upon performance standards, quality metrics, and service expectations between the SaaS provider and the customer. It defines critical aspects such as uptime guarantees, response times for support inquiries, data security measures, and maintenance schedules. SLAs establish service level guidelines, providing a basis for accountability and dispute resolution if the SaaS provider fails to meet these standards. SLAs are crucial for ensuring customer satisfaction, reliability, and the overall quality of the SaaS offering.
Renewal or Autorenewal Clause
A renewal clause in a SaaS contract specifies the terms for automatic extension beyond the initial term. If neither party provides written termination notice within a specified timeframe before the contract’s expiration, the renewal clause triggers an automatic renewal extension for a predetermined period. This ensures continuity of service unless one party actively opts out. Renewal clauses streamline contract renewal, provide revenue predictability for the SaaS provider, and ensure uninterrupted service for the customer. They are an essential component of SaaS contracts, requiring careful attention and management.
Termination Clauses
A termination clause in a contract defines the conditions and procedures under which either party, the customer or the SaaS provider, can end the contractual agreement before its natural expiration. This clause outlines permissible termination reasons, such as breaches, non-payment, or mutual agreement, and specifies the required notice period. It may also detail any penalties, liabilities, or refund policies associated with early termination. The termination clause protects both parties’ interests, ensuring a clear process for contract cessation and addressing potential disputes or contingencies during the SaaS agreement.
Intellectual Property Ownership clauses
An intellectual property (IP) ownership clause in a SaaS contract delineates the rights and ownership of intellectual property developed or utilized during the course of the contractual relationship. It typically specifies that the SaaS provider retains ownership of its pre-existing IP, while the customer may have certain rights to use the SaaS application and any customizations created for them. Additionally, the clause often addresses the handling of customer-generated data within the SaaS platform, outlining data ownership, usage rights, and data protection measures. The IP ownership clause serves to clarify the rights, responsibilities, and limitations regarding intellectual property, reducing potential disputes and ensuring a clear understanding of IP-related matters in the SaaS agreement.
Liability Clause
A liability clause in a contract outlines the legal responsibilities and potential financial consequences for both the SaaS provider and the customer in the event of disputes, damages, or losses arising from the use of the SaaS product. It defines the extent of liability, often capping the SaaS provider’s liability to a certain monetary amount or limiting it to specific types of damages. Conversely, it may establish the customer’s responsibilities, such as data backup and security measures. The liability clause mitigates legal risks, clarifies obligations, and establishes a framework for resolving disputes and addressing liabilities, contributing to a fair and well-defined contractual relationship.
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Reference to Other Documents (Such as a Statement of Work)
To reference other legal documents within a contract, such as a Master Service Agreement (MSA) referencing a Statement of Work (SOW), you typically include a clear and specific provision in the MSA. In the MSA, you specify that the SOW’s terms and conditions are integral, stating it’s incorporated by reference or forms an appendix to the MSA. Include details on where to find the SOW, ensuring legal binding and enforceability, streamlining the relationship and providing clarity on work scope and obligations.
Software Licensing Details
Software licensing in the context of a SaaS contract refers to the terms and conditions governing the customer’s right to use the SaaS provider’s software application. Unlike traditional software, SaaS operates on a subscription model. The licensing clause in a SaaS contract defines the scope, duration, and limitations of the customer’s Internet-based access and use of the software. It outlines permissible actions, such as user numbers, data storage, and any restrictions on reverse engineering or resale. This clause clarifies rights and obligations, ensures compliance with licensing terms, and protects the provider’s intellectual property, playing a critical role in the SaaS contract.
Clauses to Include in SaaS Contracts
SaaS contracts can be tricky but if you include these clauses you’ll be getting off to a good start. Contract Sent looks to track these clauses and the changes you make to them when you negotiation contracts.
