SaaS Agreements: The Complete Guide To Managing Them Effectively

Contract Management

Vendr | Data-based buying decisions
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Vendr Team
Published on
March 17, 2022
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SaaS agreements are a necessary part of the business process. When done right, all parties are protected. But if done wrong, the consequences can be costly.

For example, bad SaaS contracts can lead to litigation. With litigation comes diverted resources and focus. Bad SaaS agreements can become more costly while reducing productivity.

To help you avoid being surprised by a SaaS contract’s terms, here's how to create, review, negotiate a SaaS agreement — from understanding your company’s needs, to ensuring that an agreement’s terms and conditions meet those needs: 

What is a SaaS agreement?

A SaaS agreement, or SaaS license, is a service agreement that defines the terms and conditions of a software program. Here’s an example from project management SaaS tool ClickUp’s Terms of Use. 

Vendr | ClickUp

SaaS agreement vs. software license agreement

Unlike with SaaS agreements, under a software license agreement, companies physically install software and sometimes hardware. With license agreements, vendors grant customers rights to copy and use the software to protect a vendor’s interests. These can be things like copyrights, patents, and intellectual property rights.

But with a SaaS agreement, the subscriber receives a service without installing anything anywhere. In other words, a SaaS provider only permits a customer to use the software and no hardware is necessary. 

Types of Agreements SaaS Companies Need

Not all SaaS agreements are the same. Different types are created to address different areas of the business and how each interacts with stakeholders both in and outside the company. Here are the two general areas to consider when thinking about the SaaS agreements you may need that go beyond your typical customer agreements. 

Company-level agreements

These types of agreements are typically internal. They outline the SaaS relationship between you and your employees or stakeholders. Company-level agreements are often used to protect intellectual property. 

Some examples of company-level agreements are: 

  • Employment agreements
  • Shareholders agreements
  • Confidentiality/non-disclosure agreements
  • Assignment of intellectual property, or IP transfer agreements

Customer and third-party agreements

Customer agreements are there to outline your relationship with customers as a service provider. For example, a service agreement outlines what services your customer should expect from the product you provide. 

Here are some examples: 

  • Sales order agreements
  • Service level agreements
  • Advisor agreements
  • Affiliate or partner agreements
  • Terms of service/terms of use
  • Master services agreements
  • Purchase agreements
  • Contractor agreements

Why is a SaaS agreement important?

SaaS agreements establish the vendor and customer relationship in writing so both parties know what to expect from each other. Should either party forget, or if new people become a part of one of the parties, they can reference this record for clarity. You and the SaaS vendor should get what you want out of your new relationship in either case.

How to read a SaaS agreement

SaaS agreements vary based on industry, product, and service. Moreover, specific clauses can adjust a contract to a customer’s unique needs. But most SaaS service agreements will share similar terms and conditions due to vendors delivering them via a cloud service. Below is a list of those terms and conditions and what questions to ask.

SaaS agreement terms & conditions checklist

☐ Access rights and users:

  • What defines a user?
  • How many users get access?
  • Are there further terms of use and privacy policies?

☐ Customer service and support:

  • How will the vendor provide support services?
  • How quickly will they respond?
  • Are there any other guarantees?

☐ Data ownership:

  • Who owns the rights to the data entered into the platform or service? (Ideally, this should be the customer.)

☐ Data security:

  • Who is responsible for encryption?
  • How often is data backed up?
  • What other protections does the vendor offer?
  • How secure and private are confidential information and personal data?
  • What happens to the data in the case of a security breach, bankruptcy, or service use termination?
  • Where is the data stored?

☐ License scope:

  • Are any rights to the SaaS application transferrable? (Not typical for SaaS agreements.)
  • If so, what are they?

☐ Limitation of liability and disclaimer of warranties:

  • For what damages are the vendor liable, especially when it comes to downtime, loss of data, and functionality?
  • What warranties do they offer?

☐ Performance objectives:

  • What can you expect from the vendor in terms of guarantees and results?
  • What does the vendor not promise?

☐ Pricing:

  • What does the vendor charge for service at monthly, quarterly, or yearly intervals?

☐ Service level agreement (SLA):

  • What is the minimum performance standard stated in the vendor’s service agreement?
  • What are the vendor’s consequences should they not meet the agreed-upon standard?

☐ Subscription plan and model:

  • What does the vendor’s subscription plan include?
  • How will they deliver service?

☐ Term(s), termination, and renewal clauses:

  • When does service begin (effective date)?
  • When does service end?
  • What are the renewal terms?
  • How much advance notice does the vendor need for cancellation before renewal?

How to negotiate a SaaS agreement

While you can potentially negotiate for every clause in a SaaS agreement, CSO Magazine recommends “5 best practices for negotiating SaaS contracts.” 

Here’s our summary of these practices:

1. Create a master list of risks relevant to your organization.

Consider how your company will use the service. For instance, will you use it internally or externally? Also, will your customer data reside on the vendor’s platform? And if so, do they have all relevant security and privacy policies in place to protect the data?

2. Communicate what’s non-negotiable to stakeholders.

Do you know who the stakeholders are? If so, do you know if they’ve been involved or considered from the start of negotiations? What are the non-negotiable security items?

Possible stakeholders can include:

  • Approvers, like customer success, product teams, or finance leadership
  • Authorized signatories
  • Customers
  • Legal counsel or law firm
  • Sales managers and account executives
  • Sales operations managers

3. Negotiate additional protections

Vendors might only offer certain protections based on their physical and non-physical limitations, but you could still negotiate on the insurances and which cybersecurity events they’ll cover.

4. Insist on early breach notification.

When it comes to regulations like the General Data Protection Regulation (GDPR) and Payment Card Industry (PCI), notifying customers within a specific timeframe of a security incident is a must. So negotiate with the vendor to include provisions for breach notifications.

5. Pay special attention to contract termination conditions.

Ensure your rights to reclaim your data. Will you need a transition support clause granting you extra time to move to another service provider? If so, include it. Also, ensure the SaaS vendor deletes all of your customer’s data from their infrastructure.

When to use a SaaS agreement

To protect your company, its interests, and its customers’ data, you should always use a SaaS agreement when procuring a software service. Any reputable SaaS vendor will require one. 

It doesn’t matter if you create SaaS products for baby showers or you provide software services in the healthcare industry. It’s always a good practice to protect the interests of all parties involved with legally binding and clearly outlined SaaS agreements. 

Vendors: How to create a SaaS agreement

Creating a solid SaaS agreement involved getting clear on a few key guidelines first. Though there isn’t a one-size-fits-all SaaS template you can use for every agreement, they each generally contain an array of key SaaS usage information worth outlining.

If you're a SaaS company who is developing your first SaaS agreement, here are the steps you should follow. 

1. Thoroughly describe your services

When creating a solid SaaS agreement, you want to thoroughly describe the services you offer within the agreement. You’ll want to determine how detailed you get with the services you provide. Think about pointers like:

  • What problem does our software solve?
  • Do we provide multiple solutions in one? What do each of them address? 
  • How can customers expect to use our services?
  • What results is the software designed for? 
  • What type of access will customers have to your services? 

Thinking through these questions can help you capture and describe key components of your software services that should be included in your SaaS agreements where appropriate. 

2. Outline consumer data usage

It’s important that you clearly outline how you’ll use the data you collect from your users. Ensure specifics like:

  • Data backups
  • Data security
  • Data retrieval
  • Data ownership
  • Data usage

Laws and requirements can vary by state, so it’s important to consider consulting with privacy lawyers to ensure you stay compliant with the data usage laws in your state. This is also a great way to know what lawful usage of customer data is for your SaaS product so you can collect and use data accordingly. 

3. Specify your access clause

The access clause — the specification that defines the limits of what users can do with your SaaS product — is a vital part of the agreement you create with your customers. 

The access clause needs to be thorough and specific about what permissions your customers get. This way there’s no gray area left to interpretation that could be vulnerabilities in case of legal action. 

Outlining a detailed access clause also helps protect your company from liabilities. In the case that your software is misused by any party, you’ve clearly outlined your access terms and stay clear of being implicated negatively in a legal scenario.

4. Include any warranties 

How well can you guarantee your product will work? On the other hand, maybe you don’t offer any type of warranty. Either way, ensuring that you are clearly defining what your warranty clauses are is an important part of your SaaS agreement. 

Your warranties can be as specific or as general as your SaaS product dictates. For example, you might promise a 99.99% uptime if you work in an industry that demands it as a critical part of their line of work. 

Yet, a more general warranty might just do the job of stating that your SaaS product is expected to work at industry-appropriate levels. The clearer you are about your warranty and its limits—or lack of one—the more you avoid potential legal dilemmas down the road. This leads us into liabilities and how to define those within your SaaS agreements. 

5. Address liabilities and define a “governing law”

If a customer purchases access to your SaaS products, they can have expectations on how well the product works that may be legally protected. Say your SaaS product doesn’t work up to your customer’s expectations. In a worst case scenario, they can seek legal actions for “damages” caused by your product.

However, addressing these potential liabilities in your SaaS agreements largely cuts down the amount of legal action any one user can take against you. In your SaaS agreement, customers can agree to limit their future legal claims against your software company. 

Just about every SaaS product has to limit their liabilities to protect themselves. This is why it’s necessary to consult with your legal team and make sure that you’re protected in case of any legal action. 

Additionally, a governing law specifies which country’s laws your software agreement is protected under. This is an important piece of the puzzle that must be outlined when you your SaaS product serves customers outside of the country you operate in. 

How Vendr can help manage your SaaS agreements

Stay on top of your contracts, never miss a renewal, set up an approval process that works, and keep spending under control. With Vendr, you’ll be able to: 

  • Automatically detect invoices across the company to help identify duplicate spend and shadow IT.
  • Upload contracts and documents and record key metadata in one platform for easier access.
  • Track all your opt-out and renewal dates in one place with the Renewal calendar.
  • Extract and maintain up-to-date metadata on all of your vendor agreements through the Contract Concierge service.

Looking to better manage your SaaS stack? Start with Vendr's SaaS stack template.

Vendr Team
Vendr Team
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Vendr's team of SaaS and negotiation experts provide their curated insights into the latest trends in software, tool capabilities, and modern procurement strategies.

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