What is SaaS Agreement? A Complete Guide

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Janvi Vekaria

Senior Writer:

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green tickPublished : December 10, 2022

Whether you are developing SaaS agreements or signing one, it can put you in limbo due to several details. However, you don’t need to worry if you aren’t getting it. We’re here to help.

Like other legal documents, SaaS agreements are easy to understand when you break down each part and try to understand it in bite-sized form. And that’s precisely what we will be doing in this blog.

So, let’s get started.

What is a SaaS Agreement? 

SaaS AgreementSource

SaaS stands for Software as a Service, and SaaS agreements are special cloud service agreements that define the terms and conditions a software business model must abide by. In such a model, the data and the software will have central hosting, and users will access the data and software via an internet connection.

In simpler words, SaaS is a cloud agreement between SaaS buyers and vendors that lays the guidelines and disclaimers on how a user would access the software while defining the payment and SaaS subscription management.

SaaS agreements can either lay out precise service modules or give accessibility to products with traditional licensing too!

Moreover, the data in a SaaS model is directly saved in the cloud after uploading to a system. Thus, there is no requirement for heavy hardware or software additionally!

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How is a SaaS Agreement Different From a Licensing Agreement? 

Clauses Found in a SaaS AgreementSource

SaaS Agreements or Cloud Agreements and Licensing agreements are provisions on the terms and conditions concerning software accessibility and usage. But, since they are two different terminologies, a few viable differences keep them separate.

So, let us look at them in detail!

1. State

Software as a Service Agreement: The software here is intangible and has a platform hosting.

Licensing Agreement: The software is available in a physical state in the form of electronic downloads or CDs -Roms (they can also work as hardware later on).

2. Information Security

SaaS Agreement: The data and confidential information here are kept with the software association that would provide data safeguarding.

Licensing Agreement: All the software information is in the hardware, and the user is responsible for handling and managing all data security aspects.

3. Fees

SaaS Agreement: The fee is on a recurring module through specific term subscription models.

Licensing Agreement: The payment and pricing structure is full and upfront.

4. Maintenance

SaaS Agreement: There’s no differentiated maintenance service besides what’s mentioned in the hosting package with technical support and requisite hosting.

Licensing Agreement: They require maintenance-specific services for timely updates, fixing bugs, etc.

5. Subscription Basis

SaaS Agreement: Helps the software company cut down on the upfront cost as the Subscriptions are annual or monthly. It comes in operating expenditure.

Licensing Agreement: A giant investment is needed that can be pushed into the capital expenditure.

What are the Important Clauses Found in a SaaS Agreement? 

Important Clauses Found in a SaaS Agreement

It might be easy to manage the theoretical aspect of a SaaS agreement clause; however, the follow-up of each clause might become challenging as multiple SaaS agreements mention a mammoth number of terms and clauses.

But here’s a list of a few clauses available in almost all SaaS and cloud service providers agreements.

1. Scope of Software License

One key point is that the Software as a service contract is about the SaaS licensing service, not the software. Thus, many of you would find “scope of licensed access and use” or “scope of permitted use” instead of “scope of small business license” mentioned.

The SaaS agreement details generally define the rights and limits a subscriber would get upon subscription.

Below Is A List Of Pointers That Fall In This Clause:

  • The SaaS Service clearly defines the service applications that customers are liable to use and the restriction on getting a physical software copy.
  • The permission extent should have a strongly laid SaaS metric system (data amount or number of users) that traces the extent of use and penalties for abuse.
  • Non-exclusivity permits using SaaS services for more than one customer, wherein customers can use the software over one database where each tenant’s data is private.
  • The authorized technologies, facilities, accessibility, and service usage.
  • The duration of the entire project.
  • The assignments and transfer.
  • Market, purpose, use, and restrictions.

2. Limitation of Liability

The limitation of the Liability clause would stare two listers in specific:

  • Circumstances leading to SaaS and Software providers paying for customer damage.
  • The Threshold amount owed for damages
  • Limited provisions in the SaaS contract help protect the SaaS vendor from the event’s impact beyond the developer’s control.
  • The limited provisions of the SaaS Contract usually have the following:
  • Exclusion of consequential, special, or indirect damage
  • A contractual damage specification where providers might have a higher cap for a customer data breach.

3. Tenure, Renewal and Termination

The above-given clause establishes the rule for the cloud storage services agreement’s terms, the termination process, and ways for the account’s renewal.

Most SaaS providers go for evergreen renewal, in which the contract shall renew as soon as it reaches the specific established date mentioned in the agreement. If the SaaS and cloud services subscriber wants to discontinue, they must terminate before the specified renewal date.

This clause presents itself in the following ways:

  • The Term of the Agreement defines the period from which the contract would be effective.
  • The Effect of Termination shall record everything on the subscriber’s termination of their accounts and everything that will happen upon termination.
  • The Term of Renewal shall state the auto-renewal of the account unless the subscriber or provider terminates it.
  • The tenure shall mention the period for which the agreement shall last.

4. SLAs (Service Level Agreements)

The SLA or Service Level Agreement is a critical component of a SaaS agreement that describes all the minimum performance standards with a precise concern over service availability.

The valuable metrics for all potential subscribers include availability hours and quick response time. Below is a given list of pointers included in a SaaS SLA:

  • KPIs (Key Performance Indicators) and Performance metrics include:
    • Accepted error rates.
    • The highest number of security issues in a month.
    • Rate of first-call resolution.
  • Support, time, and Response availability
  • Penalties, in case the provider fails to meet the performance level, the customer can have compensation in the form of free features for a given date or deductions in the bill.
  • Exclusions, where the customers wouldn’t be compensated for performance compromise that’s beyond the provider’s control
  • Guaranteed percentage of uptime, like 99.99%

5. Customer Service and Support

The Customer service and support clauses are easy to understand. It talks about the SaaS vendor’s offered support and guarantees with the service.

This provision generally includes:

  • Support timelines: A help desk is available 24/7 from a dedicated customer support manager through email, phone, chat, or omnichannel.
  • Response Time: The response time is generally the time in which the support team shall get back to the queries
  • Additional listing related to the service

6. Ownership and Security of Data

The cloud-based applications come with many unsegregated and SaaS provider data. Thus, it becomes essential for software as service contracts to have data ownership and security responsibilities.

The data ownership states the owner of the data; below are the listers for data storage security provision:

  • Data Protection Process, including the vendor’s responsibilities in the context of processing, storage, encryption, and security
  • Customer compliance on data protection relates to storage, protection, processing, and data encryption responsibilities.
  • Security Breach protocols, stating that acts of SaaS vendor and data upon cases of cybersecurity leaks, other forms of data theft.
  • Data Return, stating the effect on data upon service termination and bankruptcy

7. Refund

The refund process should also be mentioned in the clause. The key features may include the following:

  • No Refunds (in the context of any rights)
  • Partial refund when an agreement gets terminated midway
  • The refunds set essential parameters by spelling circumstances on occasions of refund and no refund.
  • The agreement might offer partial refunds for customers who terminate the subscription midway. It lies more on the commercial side, and legal consultation stands implant in evaluating results after offering refunds.

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4 Types of Agreements SaaS Companies Need 

In case you own a software service company, there are agreements at various levels. Besides the Software as a service agreement for service/terms and customer usage, you would also require other things in the agreement!

1. Company-level agreements 

  • The company-level agreements include the following:
  • IP (Intellectual Property) transfer and assignments non-disclosure agreements
  • Confidential and non-disclosure agreements
  • Agreements for shareholders
  • Agreements for Employment
  • Customer-facing agreements

2. Agreements for master service

  • Agreements on purchase and sales order
  • Agreements for service level
  • Terms of use and service

3. Third-party  rights agreements 

4. Public facing policies

  • Private policies
  • Trademark policies
  • Security policies

SaaS Agreement Checklist 

Before you move ahead with the SaaS agreement, here are the final SaaS Agreement checklists you must cross-check before closing the agreement.

SaaS Agreement Checklist 

1. Billing Details 

Pricing makes up for a very significant aspect of the SaaS agreement. Therefore, a buyer should start by negotiating the subscription and detailed cost. The subscription plans might be monthly, yearly, or a combination. They must think and choose what’s most appealing to them.

Look closely for the hidden charges, as the extra cost might pop up anytime. Also, watch for renewal clauses. You might find an auto-renewal clause with or without a price increment.

2. Data Privacy & Confidentiality 

The next thing you need to check out is the data-sharing agreement. There are times when the sensitive data would require going to the subcontractors. There should be clauses on all such data protection in all cases.

Your confidential data can be your financial data, customer data, source code, and design files. So, checking how the vendors are using the data is a must.

If there’s nothing mentioned about data confidentiality, you must ask if the data would be shared with third parties. In case it is a yes, clear the purpose.

3. Opt-Out Clause 

Opt-Out Clause 

You may not like the service of your SaaS provider after a while. So how do you terminate the agreement? Would you have to pay for backing out? All the answers would be mentioned in the opt-out clause, and you must go through a negotiation cycle.

Events that would lead to opting out from the service include:

  • Reaching the subscription’s end-stage
  • Violation of service quality by the vendor
  • Security Breach

4. Intellectual Property Rights (IPR) 

There’s an inclusive clause in most IPRs about copyrights, patents, trademarks, and others.

While the source code and software ownership are with the vendor, the customer should own the data and information, including documents, images, and developed codes on vendor platforms.

The agreement must ensure that you are the owner of all intellectual property, the development of which was initiated on the vendor’s platform.

5. Data Ownership Service Level Agreements 

SLA and Data ownership ensures the quality of service you get from your vendor. Therefore, getting an SLA clause in your agreement is very important. The SLA clause usually covers the following aspects:

  • The service from the SaaS vendor
  • Gravity-based average response time mentioned
  • Quality service definite mechanism

The penalties on the vendors in case they forget to meet quality expectations.

With SLAs, you have a sense of legal binding contract assurance protecting any lapse structure and accountability from the vendor’s side. However, research has proved that the loss of customers due to downtimes battled by small businesses is 37%.

Amongst all, 26% of businesses faced a loss of $15000 (on average) every hour due to IT failure. Thus, you need to be extra careful with your SLA.

SaaS Agreement: What You Can Negotiate?

Companies can potentially ask for much more from the vendors while negotiating SaaS contracts. From receiving an agreement via online clicks to getting a formal contract negotiation, you can secure a pile of concessions from the vendors.

The parameter SaaS vendors use to measure their revenue is monthly or yearly. This is how they can easily report revenues to the stakeholders and inventions. Therefore, they might give you concessions to hold the contract. Further, you can get discounts, better contractual terms, and prices.

Here’s a list of nine things you must negotiate in your SaaS agreement:

  1. Discounts and total contract values
  2. Additional and recurring costs
  3. Term and Tenure
  4. Service Level Agreements
  5. Scalable methods
  6. Recovery and back-up
  7. Data collection and export
  8. Renewals
  9. Support

SaaS agreement FAQ's

A Software As A Service (SaaS ) agreement is easy to write, mentioning the various clauses finalised upon negotiation. For example, the vendor and customer, payment, support, SLAs, Terms, and tenures are some clauses in the SaaS agreement.

In a SaaS agreement, the vendor or software provider owns the software and source code, while the customers own the data and information, including documents, images, and others.

A reseller SaaS agreement has a service provider (vendor) who grants another business, the reseller, all the rights to come into a contract with the customer (third-party) and provide the service to the customer as the principal

The SaaS service agreement clause defines the service vendors provide to the customers. It also talks about the expected service from the vendors.

It is imperative to pen down the critical clauses in the SaaS service agreement, including Terms and Tenure, Limited Liability, Scope of Work, SLAs, and others. Further, it is also vital to checklist the agreement. Remember, negotiation is crucial!

Updated : February 23, 2024

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