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Negotiating B2B SaaS Contract Liability

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Negotiating B2B SaaS Contract Liability - Contract Sent

When negotiating B2B SaaS contract liability with enterprise customers the most common sticking point for the negotiation is the level of liability that sits with the software provider. More often than not small software providers are in positions of limited power when it comes to negotiating software as a service contracts. They are in positions of limited power because the counter party to the negotiation is larger and, generally, the SaaS company really needs to make a deal happen to keep their growth going. This article will lay out some tips and tricks of how to negotiate though this mismatch in strength to find a middle ground for both parties to be happy.

Why liability matters in SaaS contracts

Liability is one of the core sticking points of contract negotiation because it outlines what happens if things go wrong. What a lot of SaaS startups don’t think of is the level of risk that a large enterprise company is taking on by using a startup as a supplier. From the view point of the an enterprise company and their legal team they have little understanding of the startups security, financial viability or ability to maintain their service levels. In many cases these companies are adopting a piece of technology into their tech stack that may store private information or may become integral to a part of their operations. So a level of liability is how their offset this risk.

The opposite is true for the startup. They are looking to limit the level of liability that they are opening themselves up to. Why? Because SaaS businesses are built off a premise of serving a large number of customers with one product and each and every contract they sign is a separate increment of liability. That means if you agree to $1,000,000 in liability in two separate contracts your gross liability is $2,000,000. As you scale this will start to become a very very large issue. Once you reach your first 100 customers you might be hitting $5,000,000 in ARR but you could have signed yourself up for $100 million in liability. This puts an extraordinary level of risk upon your infrastructure and you won’t be able to insure yourself against this level of liability. So what happens if the worst happens and you have a data leak of all of your customers data? Well, most likely, bankruptcy.

This is where things get interesting. If you were a VC or an investor would you invest in a company that could go bankrupt from one security issue? Not many would. Liability starts to impact your valuation and your ability to raise investment.

How to write liability into your contracts

Liability is just like any key negotiation point in a contract that you know will be contentious, you start with a strong negotiation anchor and understand that things will be negotiated from there. Strong anchors can come in different forms, let’s look at some examples.

limitation of liability clause saas contract zendeskThis example from ZenDesk claims zero liability. Setting up zero liability is often a good way to start but more often than not you’ll only be able to keep this in contracts if you are selling to small to medium sized businesses or getting into enterprise companies at a very low annual contract value.negotiating SAAS liability clausesThis example from Box shows a very common technique for anchoring the level of liability to a value of the service provided. In this case Box limits the liability to three months of your service fee or five dollars. This is a very low end example but very similar to what is often done in enterprise contracts. Enterprise SAAS contract liability clauses are often linked to the annual value of the contract or a designated figure, whichever is higher.

What happens when they ask for more?

First of all, expect enterprise companies to ask for more. They are carrying a lot of risk and are looking to mitigate that risk. Second of all you need to understand the biggest driver of risk for them is the unknown. More often than not a contract has reached the legal team with little context of what the use case of the SAAS product is. Most buyers don’t have the foresight to explain, in detail, the data that product will collect and how it will be used. Outlining the use case for the legal team is one of the best steps forward that you can take in initial negotiations. The next step is contextualising it. Is an email address really constituting personally identifiable information? What footprint will the product have in the organisation? How many users will it have? Will any of the buyers IP be uploaded, accessed or stored by the product? These are the pieces of information that will help ascertain the level of risk that is involved.

Once the level of risk is clear one of the most useful next steps is to ensure the opposing council understands that it is software as a service that is being purchased and that in purchasing software as a service there is standardised levels of liability that are generally seen as appropriate for the industry, one of the main ones being the limitation of liability to the annual value of the contract.

Negotiating B2B SaaS Contract Liability

When to use carve outs

Carve outs are an important negotiation tactic in contract work. Having a blanket contract liability level often doesn’t make sense when the different parties put different levels of risk on different areas of a contract. A great example of this is a death or injury liability. Often large enterprise companies will argue that unlimited liability is mandatory for these areas. Generally these are the parts of the contract where you’ll have liability carve outs. As a SaaS company the likelihood that your product will cause death or injury is so infinitely small that providing unlimited liability for these areas is not a risk factor at all and will help to move the negotiation forwards. Investors will see it the same way and be happy with this.

What are the golden rules to liability negotiation?

  1. Look to provide your SaaS master service agreement to the customer before they give you theirs
    • Looking to set the precedent will allow you to say what the contract norms are and you’ll understand things rather than having to negotiation changes to an enterprises terms which they will rarely budge on
  2. Set an anchor of zero or low liability at the start of your negotiations
    • Make it clear from the beginning where an appropriate negotiation starts from
  3. Over explain the use case of your SaaS product
    • Have this written down, what data you collect and store, what is and isn’t considered to be personally identifiable data and how many people in the buyers organisation will have their data collected
  4. Be open to carve outs
    • Your negotiating and you want to keep a good relationship with the other side so always go in with something you can give to them in return during the negotiation.

Contract Sent is not a law firm, this post and subsequent pages on this website do not constitute or contain legal advice. To understand whether or not the ideas and guidance on the Contract Sent website is applicable to your business, you should consult with a licensed attorney. The use and accessing of any resources contained within the Contract Sent site do not create an attorney-client relationship between the user and Contract Sent.

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