Software as a Service (“SaaS”) is a growing trend in the way that companies provide and access software. Think about your own business. Most of the software you use is likely based on a subscription model as opposed to a one time purchase or custom order one. SaaS is a favored distribution model as SaaS providers use a third-party to host their applications on the Cloud, making their applications directly available to users over the Internet. Microsoft 365 and Adobe products are great examples of software that only requires a monthly, or yearly, subscription to access. Considering SaaS’ presence in the market, it is critical that you and your advisors know how to identify and negotiate its unique and distinct aspects.
1. Ownership.
This is one of the most important things to consider in a SaaS agreement! Both the software provider and customer will have unique concerns about ownership of intellectual property. The provider wants to protect their intellectual property represented in the software and the customer wants to ensure that their trademarks and any data that may be imported into the software continues to be owned by the customer.
Data ownership and protection are key issues in SaaS agreements This vital component of a SaaS agreement controls the rights to data that is entered into a platform or service. As data continues to have increasing value, the ownership of this data can be highly negotiated. Identifying which parties own what before and after the agreement; how data is accessed, stored, transferred, and protected; and maintaining confidentiality, are the hallmarks of a successful SaaS agreement.
2. Not a License Agreement.
SaaS agreement differs from a licensing agreement. Under a licensing agreement, a company will deliver the actual software for use, typically for a single or monthly fee. Software is typically installed at the customer’s location using a physical copy of the software. In a SaaS agreement, on the other hand, customers get access to software through the Cloud, but no physical goods are delivered to the customer. A SaaS agreement will give end users access to the products online.
3. Indemnification and Limitations on Liability.
No list of key contract elements would be complete without mention of indemnification and limits on liability. In a SaaS agreement, these include, but aren’t limited to, data breaches, misuse or misappropriation of intellectual property, and business disruptions related to unavailability. A good advisor can help ensure that you aren’t taking on any unnecessary liability when making a SaaS agreement.
4. Data security.
This section is particularly important in consumer markets. The section should detail issues like encryption responsibilities, schedule for backing up data, what happens in a security breach or if the SaaS provider files bankruptcy and where data is stored.
5. Service Levels.
The SaaS agreement should also identify what level of unavailability is acceptable should there be issues with the software. Once identified, procedures to resolve the unavailability, including time-frame for fixing the software, credits for time lost, and diagnostic reports, must be outlined in order to ensure that any issues don’t affect either the provider or subscriber.
6. Performance Metrics.
It’s important to identify the criteria by which you will judge the performance of the software. These are critical in any SaaS agreement, as performance is often tied to credits (i.e., discounts) offered to the subscribing customer.
7. Transition and Related Costs.
Sometimes the customer may need to import a large amount of data into the software for it to be useful. It is important to determine if, and to what extent, the provider will assist with the on-boarding process. This could be in the form of financial support or importing the data for the customer.
8. Warranties
It’s important that both parties be clear about their expectations for the software in question. The provider should be able to provide an accurate picture of the software’s capabilities, and the customer should be accurate in their guarantees to the provider. These should be clearly spelled out in the agreement between the parties.
Conclusion
SaaS can present unique issues when creating an agreement. It’s important to make sure that you have an advisor with SaaS experience, so you can avoid some of the less common legal pitfalls present in SaaS agreements. At Seck & Associates, we have drafted and negotiated countless SaaS agreements, both on behalf of providers and customers. If you are considering offering software as a service or subscribing to such a service, please contact our office to ensure your unique interests are protected.