SOFTWARE AS A SERVICE (SaaS) AGREEMENT
November 2020 / Reading Time: 4 minutes
Once upon a time, the “software” was invented. It was a program created by a developer which, once installed by users on their computers in exchange for paying a price, opened the possibility for the magic to begin. After benefiting from its glory for many years, the developer then realized that this type of one-time-payment software limits the growth of his business and came up with a new, more cash flow efficient idea. And this is how, in short, Software as a Services, also known as SaaS, was invented.
All jokes aside, SaaS does indeed represent the next step in software evolution. Leveraging the rapid growth of the cloud data storage industry, SaaS type businesses have disrupted the business world, and are now present in various fields of activity, like finance, sales, accounting or human resources.
From an entrepreneurs’ point of view, SaaS means that their software will be delivered to their clients as a recurring service and not as a one-time installation package. For the customers, it usually means that in order to have access to a software stored on the seller or its partners’ platform, they need to pay a monthly or an annual fee. The term of “SaaS agreement” is referring to a wide variety of agreements between the software’s developer or seller and the user (either a company or a person). Besides the Software as a Service agreement, other types of agreement gained traction during the last couple of years, like DaaS (Desktop as a Service), PaaS (Platform as a Service) or IaaS (Infrastructure as a Service) agreement.
Even though they all refer to a model in which a service is remotely hosted by the provider and delivered to a remote client, in the following lines we will focus on the Software as a Service agreement, highlighting some of the most important legal aspects to be considered. From a legal perspective, one of the most important challenges was the adaptation of the software licensing agreement into a SaaS style agreement, in order to reflect the software’s new terms of service.
The vast majority of SaaS businesses operate on a subscription model, setting different parameters for each subscription type, e.g., the number of users or monthly/annual rates. Some companies are even offering a free basic version of the software, opting to charge a fee only for the advanced versions of their software, while other more avant-garde companies use a model where the subscription fees are based on the usage volume.
For the seller of the software, a solid SaaS agreement should focus on maximizing the profitability and limiting the liability. In order to achieve this goal, the legal aspects that need to be considered while drafting the agreement are related to software ownership, intellectual property infringements, length of permitted use, modification of the software, data storage possibilities, data security, notification procedures, responsibility and liability, to name a few. Special attention also needs to be paid to end-user license agreements (EULA) or the service’s terms and conditions.
Every now and then we hear about companies, usually startups, that found themselves in trouble after using weak agreements with their clients. The sad part is that, usually, most of the things that started their problems could have been easily avoided if those companies had turned to proper legal counselling. All of these companies’ representatives can now tell you that having adequate legal documents drafted by specialized attorneys is priceless. By doing so, you will most likely ensure your company’s legal compliance on all the important aspects including data privacy and also have proper EULAs or Terms of Service in place. Even more, you’ll have at your disposal a bullet proof subscription agreement which on its own can save you a lot of trouble by preventing future legal issues. After all, SaaS products tend to have thousands or even millions of users, so making sure that you are protected is more important than ever if you operate in the SaaS business field.
The work of SaaS specialized attorneys does not end after the initial drafting of all the legal documents mentioned above for a tech startup company. There are several other important legal details for a SaaS company to consider. For example, choosing the cloud service where the data will be stored, opting between cloud computing or the more-control-over-data option of independent, private cloud. Each option involves a degree of vulnerability for the company and specific legal aspects need to be carefully addressed. Another example refers to the decision to move the entire database from one cloud center to another. While migrating the data from one cloud to another, it’s important to have in place legal agreements that can protect your company from any potential risk of data corruption or, even worse, data loss. If you are an entrepreneur that is currently thinking of starting a new SaaS company, just by considering these two examples can make you understand the legal complexity you’ll need to deal with in your new endeavour. I cannot stress enough how important it is to approach all the legal stuff in a right manner from the beginning.
Think long term! It can assure your company’s existence when in troubled waters because you probably won’t have the luxury Adobe Inc. had when it launched their first SaaS product. The worldwide known American multinational computer software company is a case study that shows an important thing: the SaaS business needs to be thought of in the long run. Adobe announced their first SaaS product in October 2011, the Adobe Creative Cloud, which led to a decrease in net revenue of about 35% over the next financial year. Confident in their new business approach, they kept the new business model and, just 4 years later, had their efforts rewarded when the value of Adobe’s shares almost tripled. The radical transformation of this software giant from perpetual licenses to a subscription model proved to be a real success, although initially was met with criticism and raised many signs of doubt. But this company was a giant even back then and had the luxury to allow enough time for their new business model to grow.
All in all, when it comes to SaaS business, it is smart to think ahead a strategy for at least 3-5 years, and a key aspect of this strategy is represented by the legal component. Having a specialized attorney who can transform your SaaS agreements into a win-win for both you and your clients can, among others, strengthen your company’s brand. Since we all know how important reputation is in the business world, this alone might prove crucial for your company’s development.
Thank you for your time!