As commercial law attorneys, much of our work is helping tech start-ups negotiate and draft software agreements. There is no doubt that the emergence of Software-as-a-Service (SaaS) – often referred to as “cloud computing” – has been one of the most profound technological developments in the commercial software industry. It is shaking up traditional software vendors and it is expected to continue disrupting traditional businesses. Think “Slack”, “Trello”, “Salesforce”, “Stripe” and “Dropbox” – these are all SaaS enterprise applications delivered over the internet.
This article will provide a basic overview of SaaS and some of the legal aspects tech start-up founders need to understand when negotiating and preparing their SaaS agreements.
What is “SaaS” and SaaS Agreements?
Software-as-Service is a software distribution model with which a business hosts software applications and makes them available to customers over the internet. The agreement or contract that governs the access and use of the software service and describes the rights and obligations of the parties is referred to as a SaaS agreement. The SaaS agreement differs from your typical software license agreement because SaaS is not a license to use the software, but rather is a subscription to software services and allows remote software access.
Benefits of SaaS
Low set-up cost: SaaS removes the need for organizations to install and run expensive software applications on their computers and data servers. It eliminates the expenses associated with hardware acquisition and maintenance, as well as software licensing, installation and support costs.
Payment flexibility: rather than purchasing software to install, or additional hardware to support it, customers subscribe to a SaaS offering. Typically, customers pay for this service on a monthly subscription or utility basis i.e. the number of users who has access or the number of online transactions.
Highly scalable: cloud services like SaaS offer high scalability. Upgrades, additional storage or services can be accessed on demand without needing to install new software and hardware.
Automatic updates: customers can rely on a SaaS provider to automatically perform updates and software improvements and modifications, which are generally free of charge.
Accessibility: customers aren’t restricted to one location and can access the service from any internet-enabled device and location.
Software Licencing Model vs SaaS Model
Software license agreements are used when a proprietary software is being licensed by the licensor to a licensee. The licensee purchases the software and receives a right to install, download and use the software. The licensor owns all the intellectual property rights in the software and related documentation. A license is a limited grant of use those rights.
With SaaS agreements, the customer does not download or install copies of the software, but remotely accesses and uses the software by logging into the software provider’s system. The software provider hosts the software either on its server or in the cloud and provides a service to the customer which consists of hosting its software, performing services to support the hosted software and granting access to the hosted software.
Important legal aspects to consider in your SaaS Agreement
SaaS agreements can touch upon nearly every area of the law, but broadly, a SaaS agreement should include clauses regarding: the services provided; the parties who will have access to the service; user obligations and prohibited use; payment terms; data collection and personal information; termination; service levels; maintenance and support services; disclaimers and liability; and intellectual property rights.
We discuss a few of these below:
Limitation of liability
The most important provision of any SaaS agreement is the liability clause as liability presents itself in many forms. What if the SaaS service is hacked or the subject of a cyber-attack and the customer’s sensitive confidential data (including banking details) is stolen? Are you going to indemnify and hold the customer harmless for all the damages suffered as a result of the data breach? Limitation of liability explains the extent of damages your customer can seek against you and how much they can sue you for. A well-drafted limitation of liability cannot be overstated!
An important consideration is whether the SaaS service is going to be up and running and functioning for a guaranteed minimum amount of time. Service level agreement or commitments are very common in any SaaS agreement. Generally, the SaaS provider guarantees that the service will be up and running for 365 days a year 99% of the time, for example. Your company will need to consider what type of service guarantees and commitments it will be making in terms of its service “uptime” and “downtime”.
Maintenance and support
What types of maintenance and support services will your company be providing? Will you be guaranteeing bug fixes in a timely manner, providing customer support via email and telephone or periodic software upgrades and maintenance? These are issues that need to be considered and which will affect your agreements with your customers. To this end, the contact details, extent of support and troubleshooting methods offered by the provider should be recorded in your agreement.
Upselling and upgrading
You should consider including language in your agreement that allows for future orders or “up-sales” from the customer. By specifying that “up-sales” or upgraded orders from the customer will be governed by the agreement, you avoid having the customer sign or click through another agreement if they purchase additional services, upgrades or expand their usage.
A SaaS agreement is designed to be a comprehensive document and as such, companies should pay careful attention to the multiple aspects of the agreement that set out their liability, responsibilities and obligations. Failing to include or properly define a crucial clause can have serious legal implications on a business’ risk, reputation and commercial relationships.
If you require any assistance in preparing any SaaS, software development or any other software related agreements don’t hesitate to contact us.