30 Jan 4 Key Clauses to Understand in Every SaaS Agreement
This article is a guide to the key provisions that every Software-as-a-Service (SaaS) company should include in its agreements with customers and other users. It applies both to B2C and B2B SaaS products. The list is not exhaustive, but it covers the clauses that are both the most important and most frequently drafted incorrectly (or omitted). We’ll cover:
- Your license to customers (critical to your revenue strategy, and it manages your legal risks)
- Your customer’s license to you (for those SaaS products that receive and use customer data, this is essential)
- Product warranties, which vary significantly for B2B and B2C products
- Liability clauses, which allow you to offer products without crippling lawsuit exposure
1. Define Your License to the Customer
The license is the part of the agreement that gives customers the right to use your product. Why is the license important? A few reasons. First, the license can be a critical part of your business model (especially in B2B products): you may offer a per-user or per-organization license, but either way, that license is limited to one licensee, and customers’ desire to purchase more licenses is how you bring in the revenue you need to keep the lights on. Second, licenses help you manage your liability. You can’t physically control how people use or mis-use your SaaS products, so you’ll want to make clear that if they mis-use them, they’re doing so without your authorization. This will shield you from liability if those third parties sue you, the developer, for harm to them caused by a user without your permission.
Licenses are not one-size-fits-all; they can give customers rights of varying scope and type. The particulars of the license will vary depending on what the SaaS product does, and what your customers need to do it with. Most SaaS products will grant customers, at a minimum, a non-exclusive, worldwide, revocable license to use and copy the product. Let’s unpack each part of this language:
- non-exclusive – many customers will use the product, so of course none can use it exclusively. If you inadvertently grant an exclusive license (yes, we’ve seen this happen before, and we’ve fixed it), then you literally can give it to only one customer, which means that you’re breaching your own contract with all of your customers because none of them is using it exclusively.
- worldwide – any customer can access your server wherever they are sitting. In B2B deals this part of the license is often negotiable; you might charge less for a license that allows a company to use the product only with its North American or Middle Eastern sales team, and more for a global license.
- revocable – clarifies that you reserve the right in some cases to terminate a particular customer’s use of the product. (See the Prohibited Uses note below).
- use and copy – by accessing a SaaS product, each user’s computer generally automatically creates temporary copies of at least some elements of the product. Legally, nobody can copy software without a license — that would be copyright infringement — so this language clarifies that customers are not infringing your rights by using the product in the way you want them to.
The SaaS agreement’s license clause often includes a section titled Prohibited Uses listing behavior that causes a user to forfeit its license. This is where we find things like using the software illegally, using it to spam or harass other customers and installing trojan horses and viruses.
2. Define the Customer’s License to You
Depending on how your product works, you may need your customers to grant you a license to use their data or content. Most data and content — most stuff that people can upload to or publish through SaaS products — is subject to copyright protection, meaning that the SaaS product’s operator could be infringing customers’ own copyright without a license to use it. There’s a simple fix: just provide a second license stating what you can do with what types of user content. For example, if your product is a website that allows users to publish content they write, or their artwork, customers should grant you a perpetual, non-exclusive, worldwide, sublicensable license to copy, create derivative works from, and publish the user content. Here we see some new license terms not explored above:
- perpetual – unlike your license to customers (which you may need to revoke), you can’t allow customers to yank their content from your website once you’ve published it.
- sublicensable – at some point your business model will likely lead you to explore selling or licensing user data to third parties. This allows you to pass your customer’s license on to third parties. Without it, you would be infringing your own users’ copyright if you shared their material outside your company.
- derivative works – this allows you to edit and condense user content rather than simply reproduce it verbatim.
- publish – this makes clear to users that their content will appear publicly and not be used only within your company.
Many SaaS products will also want to give themselves a license to store and copy user data (regardless of whether they ever share it with third parties).
3. Clarify any Warranties You Offer
The warranty is the promise you make about how well the product will work. The SaaS agreement should either make clear what warranties the product offers or make clear that you offer no warranties at all. Most consumer SaaS products offer no warranties, period. (When consumer software becomes popular, it’s because people find it useful — not because it comes with an awesome warranty, like a car or an L.L. Bean parka). And this is the case for some B2B SaaS products as well, like Salesforce and Google’s Firebase.
Many other B2B SaaS products, however, must offer some degree of warranty because customers demand them. In those cases, the warranty is an indispensable feature of the product itself. At the modest end of the warranty spectrum, the developer might promise only that the product performs only to “commercially reasonable” standards. That is vague, but not toothless, and allows customers to sue if the product’s quality really is low.
More generous SaaS warranties include aggressive promises like 99.99% uptime commitments. (This might make sense for SaaS used in healthcare or other environments where the consequences of software failures can be critical). These agreements sometimes include Service Level Agreement (SLA), which list various promises and the consequences to customers if the SaaS operator fails to deliver them. (Usually the consequences are credits against the customer’s next monthly bill).
Pro tip: as a SaaS company, try to avoid offering SLAs unless truly required to land an important B2B customer. Negotiating SLAs can delay and add legal costs to deals, and more often than not, customers will agree to more general promises about the product’s performance.
4. Limit Your Liability
By default, a purchaser or licensor of a product has broad legal rights to expect reasonable quality from the products they buy or license. If the products fail to meet reasonable quality standards, the customer can sue for breach of contract or even additional damages caused by the product. Companies can change that default legal rule, however, by simply agreeing with their customers to reduce their potential legal liability in the even the product does not meet customer expectations. Much like consumers can buy various “limited warranty” packages for cars and inkjet printers, they can agree to limit their future legal claims against software companies. And virtually all SaaS companies require some sort of liability caps (limits) as a condition to using their software. Without those limits, companies would generally need to price their products higher (to guard against higher risks) or discontinue them altogether.
With consumer and B2B software differ. Consumer SaaS products typically disclaim all liability, meaning that by using them, users promise never to sue them for any reason at all. A typical clause will say that the company will not be liable to users for direct, indirect, incidental or consequential damages. For good measure, the agreement may say this excludes claims for loss of user data or harm to a user’s computer relating to use of the SaaS product. In short: think of all the bad things that could happen to consumers when using the product, and clarify you won’t be responsible for them.
Most B2B SaaS customers will insist on some level of potential liability. The SaaS company’s starting position in the negotiation is usually, liability caps equaling several months’ subscription fees. The customer will often request increasing that cap to a multiple – for example, one year’s fees rather than three months’ fees. The company and client usually end up somewhere in the middle, depending on how hard each party pushes and what other parts of the deal they want to give up in return for their preferred liability language.
Pro tip: As a SaaS firm, resist the temptation to push your customer too hard for low liability caps. If you have skilled software engineers, experienced legal counsel and adequate business insurance, your liability risks will be low. The risk that this customer will ever sue you should be small. And in reality, if you are sued, you will likely negotiate a settlement or provide a refund, and in that case the contractual liability cap is irrelevant anyway. But your lawyer should review your insurance policy in connection with your SaaS agreements, ensuring that you have adequate insurance levels and types for your deals.
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