Contracts are the foundation of your SAAS business. SAAS contracts define the responsibilities and obligations between you and your customers, set expectations, and protect your SAAS business. However, not all contracts are created equal, a copied online template could lead to lost revenue, legal disputes, and headaches that you don’t want. To avoid this, let’s explore the essential terms every SaaS contract should include, as recommended by a SAAS contracts lawyer.
1. Description of Services
Think of this as your contract’s elevator pitch. This clause should clearly outline what your software does, what’s included in the service, and any limitations. Are you offering access to a web-based platform? An API? Both? Spell it out.
It’s important when defining services to be specific but not too specific. If your business evolves, you’ll want some flexibility without needing to revise your contracts every six months. For example:
- Define what features are included in the subscription.
- Is the performance of the software guaranteed, and if so, by what? Documentation, etc.
- Specify if any services, like customer support, debugging, custom builds, or training, come at an additional cost.
Vagueness here is an invitation for disputes later.
2. Payment Terms
Revenue is the driver of your business so having defined terms for payment, how and when, and having a clear pricing structure will allow your business to thrive. This section should cover:
- Pricing Structure: Is it per user? Per month? Based on data usage?
- Payment Schedule: When and how will you bill customers?
- Late Fees: What happens if a payment is late?
And don’t forget to outline what happens if someone disputes a charge. Without this, you’re left chasing payments like a character in a sitcom chasing rent money—fun to watch, not so fun to live.
3. Term and Termination
Every SaaS relationship has a lifecycle, and your contract should account for it. This section should address:
- Initial Term: How long does the agreement last?
- Renewal Terms: Will it renew automatically or require active renewal?
- Termination Clauses: Under what conditions can either party terminate the agreement?
You’ll also want to include provisions for early termination. Can the customer cancel at any time? Will there be penalties? Having protective termination clauses helps you forecast your ARR better, leaving it wide open could potentially lead to an exodus of customers
4. Service-Level Agreements (SLAs)
Service Level Agreements or SLAs help you set your SAAS’ performance and reliability. It’s your chance to reassure your customers that your software is going to be there and be reliable. However, some industries or price levels don’t require SLAs, but here’s something to keep in mind.
Some key components of an SLA include:
- Uptime Guarantees: What percentage of time will your service be available? A lot of enterprise level industries have 99.9% uptime, but yours may vary and there’s no reason to offer uptime guarantees if its not required of your customers.
- Response Times: How quickly will you respond to support requests?
- Remedies: What happens if you fail to meet these commitments? Will you offer service credits or refunds?
5. Data Privacy and Security
In the age of GDPR, CPRA, and a host of other acronyms designed to keep businesses honest, you need to be ahead of the curve when it comes to data privacy. This section should:
- Clarify Data Ownership: Specify that the customer retains ownership of their data but the rights you reserve as a provider.
- Data Responsibility : Explain how you’ll use, store, and protect their data. Additionally, are there laws that you need to remain compliant with while using their data?
- Security Breach: What will happen in the event of a data breach? How will you notify your customers and your customer’s customers? These are usually required by most data privacy laws.
Nothing erodes customer confidence faster than a data breach—and a lawsuit to go with it.
6. Intellectual Property (IP) Rights
Your SAAS product is the beating heart of your business. Without the proper IP protections, a customer can walk away with a portion of it. IP provisions ensure that ownership of your IP remains firmly in your hands while granting customers a license to use it under specific conditions.
Be sure to:
- Define what constitutes your IP (e.g., the software, code, documentation).
- Limit the customer’s use of your software to its intended purpose.
- Include restrictions against reverse engineering, copying, or reselling your software.
A good IP clause isn’t just about ownership—it’s about control.
7. Indemnification
This is the part of the contract that determines who’s on the hook if things go wrong. Indemnity can cost you a lot of money if you have to pay for the other side’s costs, legal fees, and expenses. Some things to consider are:
- If a third party sues your customer claiming your software infringes on their IP, will you cover the legal costs?
- If your customer misuses your software and causes a problem with their customer or a third party, will they be contractually required to defend you?
Indemnification clauses can be tricky to negotiate, but they’re essential for managing risk.
8. Limitation of Liability
Limitation of liability is generally the cornerstone of any good SAAS contract. A limitation of liability clause caps how much you can be held responsible for in the event of a breach or other issue. Nothing will tank your SAAS business faster than an uncapped limitation of liability.
Typically, as a SaaS company it’s important to limit liability to the amount paid under the contract or some multiplier. However, there’s some areas where liability may be higher such as data breach or confidential information. A seasoned SAAS lawyer can guide you through the complex world of limitation of liabilities.
9. Governing Law and Jurisdiction
Jurisdiction and choice of law are crucial to the outcome of any dispute. Most SAAS companies are international and have customers scattered around the globe. You don’t want to be dealing with disputes halfway around the world. For example, if you’re based in California but your customer is in London, do you want to deal with UK courts? Probably not. Specify your preferred jurisdiction to save yourself a nightmare.
10. Dispute Resolution
Even the best contracts can’t prevent all disputes, so it’s important to have a plan for resolving them. Sometimes you go straight to litigation but other times it would be a good idea to mediate or meet with the executive teams. Some options include
- Executive Resolution: Start with informal discussions with both executive teams to resolve the issue.
- Mediation: If negotiation fails, consider having a neutral third-party mediator help you solve it.
- Litigation or Arbitration: As a last resort, decide whether you will litigate or arbitrate.
Slanting the dispute in your favor before getting into a dispute will save you time and money.
Final Thoughts
A well-drafted SaaS contract is more than just an afterthought; it’s a crucial tool to protect your business and set it up for long-term success. If you have dreams of scaling your SaaS business, a well-drafted SaaS contract is an essential building block to scaling. An experienced SaaS contracts attorney, like Hansen Tong, can help you streamline your operations, strategize payment and retention strategies, and take the legal load so you can focus on your core product.
So, the next time you’re tempted to copy-paste a contract from a random website, remember this: investing in a SaaS contracts lawyer now not only saves you money but will help you make more money in the future.