What You Need To Know About Contractual Obligations

When you’re building your startup you’ll be getting into the thick of things with your startup sales contracts. As you agree to these contractual obligations, they will have ongoing implications on your business operations and service delivery. Contractual obligations refer to specific duties and responsibilities agreed upon by each party (the SaaS startup – you, and the customer). These duties are crucial aspects outlined in the contract’s terms and conditions, serving as the foundation for the relationship. These are important for SaaS companies that bill a year in advance. Effectively you’re taking money and promising to adhere to these obligations for the next year at least.

So you need to understand what you’re agreeing to deliver. Although every SaaS contract is different there are some commonalities that can be found. Here are some common contractual obligations in SaaS sales contracts:

Contractual Obligations – Service Provision:

Service provision in a Software as a Service (SaaS) sales contract pertains to the delivery and availability of the software services provided by the SaaS vendor to the customer. It’s a fundamental contractual obligation outlining the responsibilities of the SaaS provider in delivering and maintaining services. One of the things to keep in mind here is the level of service you’ve committed to. If, for example, you’ve committed to a high level of account management from your customer-facing team, can you deliver this for the year ahead? You’ll need to maintain this level and not downsize your efforts here.

Service Level Agreements (SLAs):

A Service Level Agreement (SLA), a specific type of contract between a service provider (like a SaaS vendor) and its customer, outlines the agreed-upon level of service and performance standards. SLAs are critical in setting expectations, providing a measurable framework for performance, and establishing consequences for failing to meet standards. A common way of defining this is the percentage uptime of the product. Common uptime buckets are 99%, 97% and 95% uptime.

An SLA is a contractual obligation in a SaaS sales contract, playing a pivotal role in defining, measuring, and ensuring the quality and reliability of services provided by the SaaS vendor. It serves as a key tool for managing expectations, fostering accountability, and maintaining a positive, transparent relationship. In turn this conveys the level of develops and devops quality that you need to maintain. Many regions and industries have specific regulations governing the protection of personal data, such as the General Data Protection Regulation (GDPR) in the European Union.

Data Security and Privacy:

The contract typically includes clauses specifying that the SaaS provider will treat customer data as confidential and will not disclose it to third parties without proper authorization. This is one of the key contractual obligations that enterprise clients look for. These provisions are contractual obligations that are crucial for several reasons:

1. Customer Data Protection:

• SaaS providers often handle sensitive customer data. Data privacy and security provisions establish the SaaS provider’s commitment to protecting this information from unauthorized access, disclosure, or use.

2. Legal Compliance:

• Many regions and industries have specific regulations and laws governing the protection of personal data, such as the General Data Protection Regulation (GDPR) in the European Union. Including data privacy and security obligations in the contract helps ensure compliance with relevant laws.

3. Confidentiality Commitments:

• The contract typically includes clauses specifying that the SaaS provider will treat customer data as confidential and will not disclose it to third parties without proper authorization. The clauses can get very specific, even down to identifying which employees can access a customers data in your database. These clauses are often linked to liability or indemnification clauses that you should also be aware of.

5. Security Measures:

• The contract may outline the specific security measures implemented by the SaaS provider to safeguard customer data. This could include encryption, access controls, regular security audits, and other protective measures.

6. Data Breach Response:

• In the event of a data breach, the contract may specify the procedures and timelines for notifying the customer. It may also outline the SaaS provider’s responsibilities in investigating and mitigating the impact of the breach.

7. Data Ownership and Control:

• The contract should clarify the ownership of the customer’s data. In many cases, the customer retains ownership, and the SaaS provider is granted a license to use data for service provision. Customers may also expect to have control over their data, including the ability to export or delete it.

8. Compliance Audits:

• The contract may allow the customer to conduct audits or assessments to ensure the SaaS provider meets data privacy and security standards. This provides an additional layer of assurance for the customer.

9. Employee Training and Awareness:

• Provisions related to data privacy and security often include requirements for training SaaS provider employees with access to customer data. Ensuring that employees are aware of their responsibilities helps mitigate the risk of accidental data breaches.

10. Liability and Indemnification:

• The contract may specify liabilities in the event of a data breach or violation of data privacy laws. It may outline indemnification clauses to protect the customer in case of losses resulting from the SaaS provider’s failure to meet data protection obligations.

11. Customer Trust and Reputation:

• Demonstrating a strong commitment to data privacy and security helps build trust with customers. It is especially important in today’s environment, where concerns about data breaches and privacy violations are prevalent. A breach could lead to contract termination, legal consequences, and damage the reputation of both the SaaS provider and the customer.
• Data privacy and security provisions in a SaaS sales contract are contractual obligations addressing the protection, handling, and confidentiality of customer data. These provisions are essential when you are dealing with enterprise customers. They ensure you meet standards for legal compliance, customer trust, and the overall integrity of the SaaS service, handling sensitive information responsibly and securely throughout the contractual relationship.

Payment Terms:

Payment terms in a SaaS sales contract refer to agreed-upon conditions and timelines for payment of fees associated with SaaS services. The customer has an obligation to pay agreed-upon fees, while the SaaS provider has an obligation to invoice accurately and provide payment details. We’ve done a writeup on what standard payment terms of SaaS contracts are here.

Intellectual Property Rights:

Intellectual Property (IP) rights in a startup sales contract refer to ownership and usage rights associated with software, technology, and related intellectual assets. This should outline the rights both while using the product as well as after the customer is no longer customer. Including provisions related to intellectual property rights in a SaaS contract is a crucial contractual obligation for several reasons:

1. Ownership Clarification:

• Intellectual property clauses in a SaaS contract clarify the ownership of the software and related intellectual assets. This is important to establish whether the customer is purchasing a license to use the software or if the SaaS provider retains ownership.

2. License Grant:

• The contract typically includes details about the license granted to the customer. It outlines the scope of the license, any limitations on use, and the rights conferred to the customer for accessing and utilizing SaaS services.

3. Restrictions on Use:

• Intellectual property clauses may specify any restrictions on the customer’s use of the software. This could include limitations on copying, modifying, reverse engineering, or redistributing the software.

4. Protection of Provider’s IP:

• For the SaaS provider, clearly defined intellectual property rights help protect their proprietary technology and innovations. This is critical for safeguarding the value of the SaaS offering and maintaining a competitive edge in the market.

• Intellectual property rights in a SaaS sales contract are a crucial contractual obligation establishing the legal framework for the use, ownership, and protection of software and related intellectual assets. These provisions help prevent disputes, protect the interests of both parties, and contribute to the overall clarity and enforceability of the SaaS agreement.

Support & Maintenance:

Support and maintenance are fundamental contractual obligations in SaaS sales contracts due to their pivotal role in ensuring ongoing performance, reliability, and customer satisfaction with provided software services. These obligations outline the SaaS provider’s commitment to addressing user issues promptly, offering technical assistance, and maintaining the software’s optimal functionality.

Regular updates, security patches, and new feature releases fall under the umbrella of maintenance, contributing to the software’s adaptability to changing customer needs and industry standards. Beyond reactive issue resolution, support and maintenance provisions also encompass proactive measures such as monitoring for potential problems, user training, and the provision of documentation to enhance the overall user experience. By including these obligations in the contract, both parties establish a clear understanding of the support services and maintenance efforts that will be provided, fostering a positive customer-provider relationship and ensuring the long-term success of the SaaS arrangement.

Why Contractual Obligations Matter In SaaS

It’s important for startups to clearly understand and agree upon these contractual obligations to ensure that they are able to deliver what they have promised to customers. SaaS contracts, especially B2B SaaS contracts are unique in that you often get customers to pay upfront for an annual period while running a company that is often cashflow negative. The risk here is that you are contractually obligated to continue providing what you’ve agreed to in your contracts into the future. For this reason the terms of the contract should be carefully negotiated and documented to avoid misunderstandings and disputes in the future.