Contracts for Early Stage: Basics of Negotiating SaaS Agreements

May 1

Early-stage executives often find themselves negotiating Software as a Service (SaaS) agreements without formal legal support. While SaaS contracts can seem daunting, understanding key issues and pitfalls can significantly simplify negotiations and protect your company.

Why SaaS Agreements Matter

SaaS contracts dictate essential business relationships, manage risk, and define the rights and obligations between your company and its customers or vendors. A poorly drafted contract can lead to unexpected liabilities, disputes, or loss of intellectual property.

Key Points of Focus in SaaS Agreements

Here are fundamental aspects to consider during negotiation:

1. Scope of Services

Clearly outline what services are included, any limitations, and performance expectations.
Specify availability and uptime commitments (e.g., 99.9% uptime). These are often included in Service Level Agreement (SLA) as an exhibit to a SaaS agreement. The SLA outlines the key services deliverables over the course of the term of the agreement.

2. Pricing and Payment Terms

Define pricing clearly, including any tiered pricing, licensing fees or adjustments over time.
Set payment schedules and clarify terms for late payments or disputes.
If using an Order Form in conjunction with your SaaS Agreement, make sure to specify whether the terms of the Order Form should prevail over the main agreement.

Note: This is important for any other areas addressed in the Order Form as well, such as term and termination.

3. Term and Termination

Clearly establish the initial term of the agreement, renewal terms, and conditions for termination. Maintain flexibility with regard to any trial terms.
Include provisions for early termination, notice periods, and consequences of termination.

4. Intellectual Property Rights

Explicitly define proprietary ownership and usage rights of software, data, and any derivative works.
Examine any ‘work product’ IP provisions to carefully consider IP ownership
Address ability to develop competitive products and to contract with other counterparties (you should always ensure you are not inadvertently limited to engage with other business partners).
Specify whether customers gain any IP rights or licenses beyond basic service use. Ensure you have a robust rights restrictions section that clearly outline permitted uses of IP.

5. Indemnification

Understand indemnity obligations, especially for IP infringement or breach of confidentiality.
Aim to limit your company’s indemnification obligations and seek reciprocity when appropriate.

6. Warranties and Disclaimers

Clearly specify warranties (e.g., software functionality, compliance with applicable laws).
Equally important, include disclaimers to limit your company's exposure to liability for implied warranties.

7. Limitation of Liability

Always negotiate caps on liability; typically, these are limited to fees paid over a specific period (e.g., last 12 months).
Be cautious about exceptions (e.g., confidentiality breaches, indemnity obligations).

8. Data Privacy and Security

Clearly address data handling practices and compliance with relevant laws (e.g., GDPR, CCPA).
Include detailed security measures and breach response obligations.

9. Venue and Governing Law

Negotiate jurisdiction clauses to avoid being subjected to legal disputes in unfavorable locations.
Agree on governing law clearly suited to your business operations and resources.

10. Survival and Assignment Clauses

Specify which provisions survive after contract termination (e.g., confidentiality, indemnification).
Clarify assignment rights to control who can take over contractual obligations in case of acquisitions or mergers.

Practical Tips for Negotiation

Prioritize your key business interests—focus on non-negotiable terms first.
Attain complete alignment with counterparty on all pricing terms and any licensing fees
Consider usage of an Order Form to house client-specific terms in order to avoid negotiating changes to your template SaaS agreement for each customer.
Use clear, simple language whenever possible to avoid ambiguity.
Be wary of overly complex clauses; prioritize clarity or propose simplified alternatives.

Conclusion

This guide offers foundational knowledge on essential SaaS contract negotiation points. However, SaaS agreements can vary significantly based on your business needs and industry standards. Executives needing comprehensive legal guidance tailored specifically to their startup’s unique circumstances should seek professional assistance.

For startup-minded legal advice tailored to early-stage companies, reach out to Runway Legal.

Disclaimer: This article is for informational purposes only and does not constitute legal advice nor create an attorney-client relationship with Runway Legal. Always consult with an attorney for advice tailored specifically to your situation.

Spencer Hawes