As a transactional lawyer working with startups, a large part of my practice is helping software-as-a-service (SaaS) companies draft and negotiate customer agreements. We work together to create a standard Subscription Agreement for the company and then develop a playbook to implement it and react to customer-proposed changes. The key is to start with a strong subscription agreement template and build from there. The following are some of the more important issues to address in a SaaS Subscription Agreement.

1.)  Limitation of Liability

The most important provision of any SaaS Subscription Agreement is the “boilerplate” language that you usually see in all caps. This limitation of liability language details what kinds of damages your customer can seek against your company, and how much they can sue you for. Within only a few exceptions, a well-drafted limitation of liability can effectively cap your company’s contractual liability. Customer damages are typically capped at the amounts paid under the contract. Customers with leverage can sometimes negotiate this up to some small multiplier of the amount paid.

2.) Strong Payment Provisions

Getting paid is pretty important to most of my SaaS clients. Without strong payment provisions, some customers will attempt to get out of paying for what they’ve purchased. The most common scenario is a customer who purchases a subscription to a SaaS service that his or her company ends up not using. Because the value of the hosted solution is spread out over the subscription term, many customers will assume that if they stop using the service midway through, they can discontinue paying the monthly subscription fee—or should get a refund for the unused portion of the subscription term. If the contract language isn’t clear, they may be right. Your payment provisions should include language indicating that the fees for the subscription are based on services purchased, not the customer’s actual usage. This is particularly important if you are giving the customer better pricing based on a long-term commitment.

3.) License Scope Limitations

The primary purpose of your subscription agreement (other than getting paid) is to clearly define—and limit—the rights that you are granting to your customer. Some of these limitations may be specific to your service; for instance, limits on the number of API calls the customer can make, or limits on the number of authorized users that can access the service. Other limitations are found in every well-written SaaS agreement. Common limitations include prohibitions on reselling the service to third parties, using the service in a manner that disrupts other customers, or using the service to develop a competitive product or service.

4.) Master Agreement Language

Include language in your contract that anticipates future orders from the customer. By specifying that subsequent 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 or expand their usage. Ideally, subsequent orders for additional authorized users or new SaaS offerings could be handled with a one-page purchase order or online order.

5.) No Rights to a Copy of the Software

As companies shifted from object code licenses to SaaS offerings, some simply adapted their existing on-site software license agreements to fit the new model. As a result, some SaaS agreements contain legacy language that doesn’t apply to a hosted service. Most importantly, you want to be clear that the services you’re providing are offered on a hosted-basis only, and that the customer is not entitled to obtain a copy of the software to run on their own hardware. Including a clear statement about this can prevent ambiguity if you are using a form that was adapted from an on-site license agreement. Avoid phrases like “Company will deliver the software to Customer,” and instead focus on granting the customer access to a service that your company provides by running proprietary software on your own servers.

Subscriptions are a critical source of revenues for SaaS companies so make sure to address the issues mentioned above in all your subscription agreements.

Guest blogger Michael Schneider is a lawyer who assists software and internet companies with business transactions involving content or technology. Mike’s practice ranges from helping clients negotiate day-to-day contracts with customers and suppliers, to consulting clients on complex intellectual property ownership and infringement issues. Follow Mike’s posts at the Law of Startups.

This article is made available by the lawyer or law firm publisher for educational purposes only as well as to give general information and a general understanding of the law, not to provide specific legal advice. You understand that there is no attorney client relationship between you and the author. This article should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.

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