Key Takeaways:
- Focus on Access: SaaS contracts should speak about granting a “right to access” the software hosted by the provider, rather than a right to install and use a copy of the software.
- Data Management is Crucial: Since customer data resides in the provider’s environment, SaaS contracts should have relevant clauses that deal with managing that data in a legally compliant manner and ensuring security of such data.
- Subscription Fees and Dynamic Terms: Payment for SaaS typically involves recurring subscription fees, unlike traditional models with upfront perpetual/term licenses.
This article explores how a SaaS vendor or customer can adapt a traditional software license agreement for a Software-as-a-Service (SaaS) offering.
Here are three common scenarios where you will find this quick reference guide helpful:
- You encounter a situation where a customer insists on using their existing software license agreement template for a SaaS deal. This checklist will help you identify key areas that need modifications to make this happen.
- You want to convert your existing on-prem software contract template to a SaaS template.
- You want to add an addendum to an existing software license agreement that covers SaaS-specific terms.
Checklist for Mark-Ups
1. Right to Access vs. License
Emphasizing the shift from ‘license’ to ‘access’ is important in SaaS agreements. Traditional licenses grant a “right to use” a copy of the software installed on the customer’s device. SaaS contracts, however, focus on the “right to access” the software application hosted by the provider. This distinction reflects the fact that customers aren’t directly acquiring a copy of the software but rather a service to utilize the software’s functionality remotely.
2. Service Level Agreements (SLAs)
SaaS, as the name suggests, is a service. Hence the contract should specify the service performance commitments. Unlike traditional licenses that focus mainly on the software itself and its functionalities, SaaS agreements incorporate Service Level Agreements (SLAs). These SLAs define specific metrics that measure the provider’s performance, such as guaranteed uptime percentages and response times for customer support inquiries.
3. Data Management
Traditional software licenses typically don’t have extensive data management clauses as the data resides on the customer’s own infrastructure. SaaS contracts require detailed provisions regarding data management due to the data being hosted in the provider’s environment. Here are some key aspects to address:
- Data Ownership: SaaS contracts usually have a clear statement that Customer owns the data they input into the SaaS offering.
- Data Privacy (including specific legal compliances): Include clauses that ensure compliance with relevant data privacy regulations, such as GDPR, PDPA or CCPA, depending on the nature of the data and the applicable location.
- Data Security: Outline the data security measures implemented to mitigate data breach risks.
- Data Return: Establish clear procedures for the customer to retrieve their data upon contract termination.
- Data Storage Costs: Address data storage fees, which are often tiered based on usage. Additionally, specify costs and procedures for customers who require additional storage beyond their included allotment.
4. Payment Terms
Traditional software licenses often involve a term or perpetual license with an upfront fee for licensing the entire software package. SaaS models typically utilize subscription billing with recurring payments spread out over a defined period (e.g., monthly or annually). In most cases, maintenance and support fees are bundled into the subscription cost, unlike traditional models where they are separate charges.
5. Suspension Rights
SaaS providers often reserve the right to suspend service under specific circumstances, such as non-payment by the customer or security breaches that threaten the integrity of the service. The suspension right for non-payment reflects the subscription model itself – since the customer is paying for access, non-payment should mean no access.
6. Online SaaS Terms & Updates
SaaS providers continuously update and enhance their software. Subscribers automatically receive the latest features, security patches, and improvements. To accommodate this, traditional software license agreements are static documents that typically remain unchanged after purchase. SaaS terms and conditions are usually dynamic and can be updated by the provider. The contract should outline the process for notifying customers about these updates.
7. Risk Related Clauses
SaaS services present a unique set of risks that are often higher risk than a software license because of the cloud component. Be sure to revisit the representations and warranties, indemnification, and limitation of liability clauses to account for SaaS-specific risks. Some examples include: breach of confidentiality, data security breach, and intellectual property infringement.
Watch 1-Hour Webinar: How to Navigate Limitation of Liability, Indemnification, & Reps & Warranties
By making these key adjustments, you can transform your traditional software license agreement into a robust SaaS contract. A well-crafted SaaS contract fosters trust and transparency, ultimately benefiting both parties to the contract.
