Getting your SaaS contracts into a good shape will help you build and de-risk your SaaS business. Your SaaS contracts are the concrete legal representation of your relationship with your customers. They can help you or harm you, especially in the long run. So here are the top ten clauses to include in SaaS contracts.
How to Get Started With SaaS Contracting
It’s all well and good to know the top clauses to include in SaaS contracts but you need to start somewhere. Every SaaS contract needs to be built to match what your business offers and how it operations. One of the easiest ways to do this is start with a SaaS contract template. Once you have a SaaS contract template the next place to move it is to find an experienced SaaS lawyer. The experienced SaaS lawyer will help you to customize your contract template into a contract that will work for your business. As part of that process you can work with your lawyer to ensure that you cover off the top ten clauses to include in SaaS contracts, so let’s have a look at them.
Clauses to Include in SaaS Contracts
The Parties Involved
Parties in a sales contract refer to the individuals or entities involved in the agreement. Typically, there are two primary parties: the “seller” and the “buyer.” The seller is the party offering goods or services for sale, while the buyer is the party acquiring these goods or services in exchange for payment. Their roles, responsibilities, obligations, and rights are defined within the contract, including details such as the product or service description, price, delivery terms, payment terms, warranties, and dispute resolution mechanisms. Clarity regarding the roles and identities of these parties is crucial for a legally binding and enforceable sales contract.
Starting and Ending Dates
The start and end dates of a Software as a Service (SaaS) sales contract play a pivotal role in revenue recognition. The start date marks the commencement of the contract, typically triggering the initiation of revenue recognition. This is particularly important to note when you go to build an MRR waterfall report. Revenue is recognized over the contract’s performance period, which extends from the start date to the end date. During this period, the SaaS provider delivers its services, and revenue is recognized proportionally based on the contract’s terms, as services are provided. The end date signifies the point at which revenue recognition concludes, aligning with the termination or completion of the SaaS services outlined in the contract. Accurate tracking of these dates is essential for proper revenue accounting and financial reporting.
The Cost to the Customer
The cost to the customer is generally recorded in monthly recurring revenue (MRR). MRR is a key financial metric used to measure the predictable and recurring revenue generated by a SaaS company on a monthly basis. It represents the total revenue a SaaS provider expects to receive from its subscription-based customers in a given month.
MRR includes revenue generated from all active customer subscriptions, taking into account the pricing plans, upgrades, downgrades, and cancellations. It does not typically include one-time fees, such as setup fees or consulting charges, as these are not recurring on a monthly basis.
MRR is a valuable metric for SaaS businesses because it provides insights into the company’s revenue stability, growth, and overall financial health. It helps SaaS companies forecast future revenue, assess the impact of customer churn (cancellations), and make informed decisions about pricing, marketing, and customer acquisition strategies. Additionally, MRR is often used in conjunction with other metrics like Customer Lifetime Value (CLV) and Churn Rate to assess the long-term sustainability and profitability of a SaaS business.
Service Level Agreement
A Service Level Agreement (SLA) in a SaaS contract is a formal and legally binding document that outlines the agreed-upon performance standards, quality metrics, and service expectations between the SaaS provider and the customer. It defines critical aspects such as uptime guarantees, response times for support inquiries, data security measures, and maintenance schedules. SLAs serve to establish clear guidelines for the level of service a customer can expect, providing a basis for accountability and dispute resolution if the SaaS provider fails to meet these defined standards. SLAs are crucial for ensuring customer satisfaction, reliability, and the overall quality of the SaaS offering.
Renewal or Autorenewal Clause
A renewal clause in a Software as a Service (SaaS) contract is a contractual provision specifying the terms and conditions under which the contract will automatically extend beyond its initial term. Typically, if neither the customer nor the SaaS provider provides written notice of termination within a specified timeframe before the contract’s expiration, the renewal clause triggers an automatic renewal extension for a predetermined period. This ensures continuity of service unless one party actively opts out. Renewal clauses are designed to streamline the contract renewal process, provide predictability in revenue for the SaaS provider, and ensure uninterrupted service for the customer. They are an essential component of SaaS contracts, requiring careful attention and management.
A termination clause in a contract defines the conditions and procedures under which either party, the customer or the SaaS provider, can end the contractual agreement before its natural expiration. This clause outlines the permissible reasons for termination, such as breaches of contract, non-payment, or mutual agreement, and specifies the notice period required for such termination. It may also detail any penalties, liabilities, or refund policies associated with early termination. The termination clause serves to protect the interests of both parties, ensuring a clear process for contract cessation and addressing potential disputes or contingencies that may arise during the SaaS agreement.
Intellectual Property Ownership clauses
An intellectual property (IP) ownership clause in a SaaS contract delineates the rights and ownership of intellectual property developed or utilized during the course of the contractual relationship. It typically specifies that the SaaS provider retains ownership of its pre-existing IP, while the customer may have certain rights to use the SaaS application and any customizations created for them. Additionally, the clause often addresses the handling of customer-generated data within the SaaS platform, outlining data ownership, usage rights, and data protection measures. The IP ownership clause serves to clarify the rights, responsibilities, and limitations regarding intellectual property, reducing potential disputes and ensuring a clear understanding of IP-related matters in the SaaS agreement.
A liability clause in a contract outlines the legal responsibilities and potential financial consequences for both the SaaS provider and the customer in the event of disputes, damages, or losses arising from the use of the SaaS product. It defines the extent of liability, often capping the SaaS provider’s liability to a certain monetary amount or limiting it to specific types of damages. Conversely, it may establish the customer’s responsibilities, such as data backup and security measures. The liability clause aims to mitigate legal risks, clarify the parties’ obligations, and establish a framework for resolving disputes and addressing liabilities, contributing to a fair and well-defined contractual relationship.
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Reference to Other Documents (Such as a Statement of Work)
To reference other legal documents within a contract, such as a Master Service Agreement (MSA) referencing a Statement of Work (SOW), you typically include a clear and specific provision in the MSA. In the MSA, you would specify that the terms and conditions outlined in the SOW are an integral part of the overall agreement. This can be done by stating that the SOW is incorporated by reference or that it forms an appendix or exhibit to the MSA. You would also include details about where to find or access the SOW, such as a specific file name, date, or location. This approach ensures that the terms of the SOW are legally binding and enforceable as part of the broader MSA, streamlining the relationship between the parties and providing clarity on the scope of work and obligations.
Software Licensing Details
Software licensing in the context of a SaaS contract refers to the terms and conditions governing the customer’s right to use the SaaS provider’s software application. Instead of traditional software, where the customer typically purchases a license to install and run the software locally, SaaS operates on a subscription model. The licensing clause in a SaaS contract defines the scope, duration, and limitations of the customer’s access to and use of the software over the internet. It outlines permissible actions, such as user numbers, data storage, and any restrictions on reverse engineering or resale. This clause plays a critical role in clarifying the rights and obligations of both parties, ensuring compliance with licensing terms, and protecting the provider’s intellectual property.
Clauses to Include in SaaS Contracts
SaaS contracts can be tricky but if you include these clauses you’ll be getting off to a good start. Contract Sent looks to track these clauses and the changes you make to them when you negotiation contracts.