Business Legal
Essential considerations when starting a SaaS business
May 25, 2015
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The benefits of a SaaS business

There are many benefits to starting a SaaS (Software as a Service) business. You have the ability to leverage the benefits of the “cloud” to provide a service to clients. They benefit from not having to install software on each of their machines – rather, the end user accesses the software through a web browser or other method. The software is always up to date and improvements are made seamlessly. The provider benefits from a subscription model, receiving income on a regular basis, rather than just a one-time purchase price.

One of the most important things that needs to be put in place before the SaaS business launches, however, is to get the license agreement written. Without one, the rights and responsibilities of the parties aren’t defined. This could lead to serious trouble down the road.

As a business, you want to avoid as much potential liability as possible. Therefore, paying attention to these three important aspects of your SaaS agreement is crucial.

One of the most important things that needs to be put in place before the SaaS business launches, however, is to get the license agreement written.

What is the license for and what can they do with it?

One of the major provisions in a SaaS agreement is going to be the grant of a license. As you are not transferring a physical good to the purchaser, you are simply giving them a license to use the product. Defining the scope of that license is paramount to having a good SaaS agreement.

If you are the provider, you generally want this license to be as narrow as possible. It should be non-exclusive, unless the provider only wants to provide their product to one user (they probably don’t). It should be non-transferable, since you don’t want the customer to be able to transfer their subscription to another party – you want that other party to also pay for the service! The provider may also want to limit the license geographically, particularly if international clients demand more cost or should pay a higher fee.

To negotiate or not

There are a couple ways of looking at the beginning of the client-provider SaaS relationship – you could negotiate the license agreement or do a take-it-or-leave-it approach.

Most users of SaaS services opt for the latter. If they don’t like the terms, they will find another provider. In many cases, the relationship is faceless – the user simply signs up for the service and clicks “agree” to the terms of use.

In many cases, the relationship is faceless – the user simply signs up for the service and clicks “agree” to the terms of use.

However, in a more customer-focused onboarding approach, there may be a period of negotiating the particulars of the licensing agreement. This is particularly true with a bigger client who has more bargaining power in the relationship. Getting their business is worth it for the SaaS provider, so some concessions or special treatment may exist.

In those situations, it’s important to be aware of the services that the SaaS provider themselves are using downstream. If one of these services has particular license provisions (perhaps related to security or contractual obligations), you can’t contradict them in your agreement with this new customer. Additionally, you need to be aware of whether or not this negotiated agreement will be cost-effective. It’s usually not a good idea to paint yourself into a contractual corner with a deal that doesn’t make money.

Limited liability and warranties

Many service providers add a blanket limitation of liability and disclaimer of warranties to their terms of service. This is important in protecting your business from serious damages in a lawsuit.

However, it’s also extremely important that the client actually agrees to these provisions. If you hide your terms of use at the footer of the site and don’t get the client to affirmatively agree, you may be out of luck if you get sued.

I’ve written about this issue a few times on my other blog. Check the posts out to learn more about getting a legally-effective terms of use on your site.

Data security

It is vital that you, as a SaaS provider, understand exactly what data security measures that you and your own providers (if you’re using third-parties to perform certain functions) have in place. For certain industries, security is paramount.

Some of the issues that should be dealt with are:

  • Encryption of data
  • Sharing with third parties
  • What happens if there is a breach
  • What happens if there is a subpoena or government request for secured information

These may be important considerations for your customers, and should be for you as the SaaS provider. You need to be able to answer these questions. This is doubly true if you are using other third party services to perform the services your company offers.

Terminating the agreement

When either party wants to end their use or provision of the SaaS service, there should be terms for this termination in the agreement. Various questions could be address:

  • What happens to the customer’s data?
  • Will they be able to download said data prior to termination?
  • How long after termination does the provider need to retain data/records?
  • How much notice must be given prior to termination?

Again, these may be subject to negotiation for a particular customer, or they could be boilerplate policies that are generally applicable. It all depends on the customer and their bargaining power in the relationship.

When either party wants to end their use or provision of the SaaS service, there should be terms for this termination in the agreement.

More questions remain

These are just a few of the things that may need to be addressed in a comprehensive SaaS agreement. Going into this without a contract could be a very bad idea. No one starts a business with the intent to screw up, but if that screw-up happens, it’s nice to know that there are contractual terms in place to protect the business owner.

Luckily, a good Internet lawyer will be able to walk you through these issues and distill them into the site’s terms of use. As always in these situations, it is important to get professional assistance and take the business seriously.

About author

Zachary Strebeck

I'm a solo practice lawyer and full-time digital nomad. I run my law practice at www.strebecklaw.com, representing Internet, mobile software and gaming entrepreneurs. I also blog about digital nomad travel at A Lawyer Abroad.

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