SaaS Agreement: What Should It Include and How to Write It?
You did it, you’ve invested time, money and resources to develop and produce your own Software-as-a-Service (SaaS) product. Now that the process is complete, it’s time to promote and begin seeing a return on your investment. You have all the checks of a good business; transparency, support, and instruction on how your newly created product can better serve your clients. However, while serving your customers are top priority, you must also protect yourself.
In this article, we are going to cover all aspects of what a SaaS agreement is, why you should have one, and how to review and build your own. While you can always hire a lawyer to perform this for you, not everyone will have the funds to do so. This process can become overwhelming if you’ve never done or heard of a SaaS agreement before. Do not worry however, I promise by the end of this article you will have the knowledge and confidence to create your service level agreement.
What is a SaaS agreement?
By simple definition, a SaaS agreement is a binding legal contract between the SaaS provider and the customer. What exactly does it do? The purpose of a SaaS agreement is to regulate and define conditions and guidelines of what you and your customer agree to when using your product. To break it down further, SaaS agreements will typically include a reseller, subscription and service level agreement. These agreements generated from the SaaS provider will paint a picture of customer service, customer data metrics, and support for the product provides.
Protecting your intellectual property rights is extremely important. But a SaaS agreement also protects the consumer, think of these terms and services as safeguards for both company and consumer. You as the consumer will gain a clear outline of what to expect and allow yourself to hold companies accountable. While as a business, the customer will understand and will be bound by contract to what is or is not allowed within the software.
A common question that will come up when discussing a SaaS agreement is, does this differ from a licensing agreement? Short answer: Yes. Explaining further, when under a license agreement the provider will typically send the actual software to use for a monthly fee. This scenario will also include the necessary hardware needed for installation. However, when under a SaaS agreement, the products are hosted in a cloud service environment. Cloud service providers will then give clients access thus making this engagement a SaaS agreement.
Now that you understand what a SaaS contract is, let’s move on to when a SaaS agreement would be needed, and some examples of companies you know that have switched to this cloud service model.
When is a SaaS agreement needed?
As I mentioned above, you’ve spent time, energy, and resources to build this SaaS cloud service. In recent years there has been a shift in the industry from selling you the software outright (Microsoft Office, Xbox Game Pass, Adobe Creative Cloud, etc.) to instead selling you a license to use the product via SaaS and cloud services. What you may be thinking? Companies have found better security for customer data, improved version and software support, and most importantly user benefit.
Let’s use a major SaaS provider like Microsoft as an example. When Microsoft introduced Office365, it built a cloud service that gave clients options based on their specific needs. Originally you needed to use a disc to install Microsoft office on a single PC in your home. This limited the number of users who were able to use this product and the devices it works with. Now with SaaS and cloud services, you can take advantage of various SaaS agreements like “Microsoft 365 Family” for home use and “Microsoft 365 E3” for enterprise businesses.
This flexibility is important to have as a SaaS provider to allow your clients the choice of plans that suit them best. So, when hatching the idea of using cloud services for your product, you must build your SaaS agreement along with the slide of it to protect your intellectual property rights and give customers a reason to choose you.
So far, we have covered the what, why, and when in regards to building your own SaaS agreement. In this next section, we are going to dive into how a SaaS is put together and the pieces that you need to look out for.
Important SaaS agreement sections
This section is intended to outline the important aspects of a cloud service SaaS agreement. Note that each SaaS contract will differ depending on the specific industry you are developing the product for.
Access rights and users
Going back to the Microsoft example, this clause defines the metric for access to the product. This is based on the number of users, or the amount of customer data needed.
- Create tiers of the product to define detailed features.
- State what a “user” is.
- Set guidelines for breach of SaaS contract.
This section will have a great impact on client buying decisions. You may have built an impressive product with anywhere accessible cloud services, but if you cannot support it properly, you will end up with frustrated customers and a bad reputation.
- How customer support would be provided (Phone, Email, Chat).
- The availability of support and how quickly response time should be.
- Special provisions for higher-end subscriptions.
Data ownership and security
Data ownership is defined as who has the rights to the information that is uploaded to the cloud services. Data security is all about how you are protecting those who use your product. The customer data subject can be touchy for some, but ultimately transparency is key when provisioning these parameters.
- How the data will be protected and what encryption/security methods will be used.
- When should the client expect their data to be backed up?
- Where the uploaded data is stored.
- What happens in case of a data breach, company bankruptcy, or termination of service.
License Scope & Limitation of Liability
In your SaaS agreement you must instruct your customers on the scope for which each license tier is used for. Once again using the Microsoft example, each package will give certain permissions to various applications. Limited liability focuses on what you will accept and deny in case of damage or loss of property. Along with a cap number of potential damages to which cloud services providers are exposed too.
Master SaaS agreement language
This clause is more about quality of life. Once you grow and add features to your SaaS and cloud services, it’s important to include a master service level agreement. This will protect you from clients who constantly change terms and try to renegotiate the services provided.
No matter how many problems your product may solve, if the cloud services it’s hosted on are slow and full of errors, no one will be happy. Be sure to define:
- Guarantee of speed and performance.
- Software maintenance services, keeping up to date with the latest data security trends.
- Potential beta testing opportunities.
- The limitations and what your product, and what it does not promise.
SaaS contract pricing
Detail each tier of the SaaS agreement, from the cost to the features, it’s important to give as much information as possible from a quick glance. Typically, a SaaS contract will use a subscription model and will accept payments monthly, quarterly, or yearly. To incentivize clients perhaps you can offer a discounted price when choosing certain pay date options.
Service Level Agreement (SLA)
SaaS agreements should always include an SLA to set a minimum standard of performance. This prior written agreement should set expectations for uptime availability for critical operations.
Term, termination, and renewal
Grouping all three of these clauses will determine the process and procedure for terminating or renewing any SaaS agreements. Normally a SaaS agreement will have a system that will auto-renew any service for another term. Unless of course, the client wishes to cancel.
Be sure to have these clauses defined and nailed down when you are building a SaaS agreement. These contracts are meant to assist and define standards. However, there are limitations to consider.
SaaS agreements and their limitations
As we have discussed so far, SaaS contracts are meant to protect you and the customer, however, that does not free you from all liability. Say for example a client is using your software for illegal activity, like stealing customer data. Since you are the provider, it is possible to be held liable regardless of the SaaS agreement.
You must also consider the possibility of being sued by clients if there is a major loss of service for extended periods of downtime. Or you as the company are not performing software maintenance services that are leaving security vulnerabilities that can result in data breaches. Earlier we discussed the limitation of the liability clause, while yes, it is designed to protect you in most cases. They could sometimes waiver depending on the jurisdiction.
We have covered a ton of information so far, the goal is? Gives you a solid foundation of the topics above. We will now go into what the best solution is when building your very first or updating your SaaS agreement.
How SaaS agreements are built
Theory always comes before practice, as in this case, we have gone over the bases for what makes up a SaaS agreement. As well as the best practices to look for. Now it is time to figure out how to create them. Please note that we will not be going over the legal verbiage, as this is not legal advice. This section is focused on the best ways for creating your own SaaS contract. Let’s begin.
The first and best option for building a brand-new SaaS agreement is to hire or discuss this with your legal team. They are experts and your most trusted source for writing the correct legal language. The best way to approach a SaaS agreement is by creating a template that will give you the option to change the names of each client. This will save you a ton of time and resources when onboarding new customers.
Another avenue to consider is online SaaS agreement builders. The internet is a great resource, once you feel comfortable enough you can choose to use an online builder that will setup a template for you to use when getting started. Once you become more established in your industry, perhaps you can create an updated version using a professional lawyer.
Perfect, we have now covered what a SaaS contract is, why you need one, when is the best time to obtain one, and how to go about creating one. This isn’t the only agreement you should be looking at however, in the next sections we’ll quickly touch on other company agreements you need when starting a SaaS business.
Other company agreements
Internal Company Agreements
While employees are the vital pieces that keep your company moving, they have certain access and knowledge about your Standard Operating Procedures (SOPs) that must be protected.
- Assigned Intellectual property rights and transfers.
- Non-Disclosure Agreements (NDA)
- Employee Standards
- Shareholder Standards
If you decide to white label your product or allow integration with third-party software, proper outside vendor SOPs must be defined.
- Affiliates, or Partners Agreement
- Contractor or Freelancer Agreements
- Advisory Agreements
While I could continue to tell best practices and what is needed when creating a proper SaaS agreement, I would rather show you some important examples of these SOPs in action.
Examples of SaaS agreements
At the beginning of this article, I used Microsoft Office365 as a well-known major SaaS example. Let’s take a look at their terms of service and break down some of the important pieces. As you can see from the image below, Microsoft is defining the first part of their SaaS agreement: Access rights and users. You can see the details that are gone over for each sub-section of terms of service. From defining the do’s and don’ts when creating a Microsoft account, to account use and termination. They are detailed in their approach in covering all bases for using their platform. Even to go as far as discussing child accounts.
Next up we have Adobe, specifically the master agreement that can be found here. The seven-page document goes over all of the clauses we discussed in this article and more. On the first page, Adobe leaves a spot open for various clients’ names to who it pertains too. They also define the verbiage of each important word or phrase in the PDF file. This is a perfect example of a subscription-based SaaS agreement that you may speak to an attorney about when creating your own.
If you have made it this far, first off thank you and I hope you enjoyed the article! To recap what we went over I’ll answer the following questions.
What is a SaaS?
A Software-as-a-Service is a product or program that can deliver its features over a cloud service. A SaaS eliminates the need for on-premises software and hardware installation saving you time and money.
What is a SaaS agreement/contract?
This is an agreement that defines the Standard Operating Procedures (SOPs) and terms a client must agree to when using your product or service. This protects the business and customer data.
When is the best time to build a SaaS agreement?
The best time to create a SaaS agreement is when you have completed your program development and are ready to launch publicly for use by companies or individuals.
How do you write a SaaS agreement?
The best way to have a SaaS agreement writing is to find a professional legal team that can create a master agreement template on your business’s behalf. If you cannot afford a legal team, consider using an online SaaS agreement template builder that you have done research and trust.
You should also focus on the major components of a SaaS agreement that need proper definition and structure as mentioned in the section titled “Important SaaS agreement sections”
Cloud consulting companies are always in the world of the next “Big Thing” in tech. Having the flexibility to adjust your terms is essential to building a proper business. Be sure to revisit your terms every so often to keep up with new trends and best practices. When doing so don’t forget to have existing users agree to these updated terms.
Now that you have gone through and reviewed the information in this article, you should leave with a better understanding of what a SaaS agreement is and how to go about getting one for your business!