Avoid SaaS Legal Mishaps. Essential Legal Documents and Concepts to Know.

Software-as-a-Service (“SaaS”) legal documents should be written to promote: 

1) clarity,

2) momentum in the sales process or procurement process,

3) intellectual property protection,

4) sensible and secure monetization or savings,

5) appropriate risk mitigation, and

6) your company’s reasonable bargaining position in inevitable negotiations with supplier or customer prospects of scale. 

As deals become more complex (particularly in connection with business-to-business transactions), SaaS companies must expect and strategically plan for ever increasing sophistication in prospect demands and negotiations. Unless your company has reached a market scale whereby your standard terms are virtually non-negotiable, your company should proactively position itself effectively for negotiations.

If you would like assistance, feel free to contact me directly at gary@b2world.com, +46(0)70 752 16 80. B2World offers package solutions for clients to onboard a best-practice, SaaS contract library efficiently and affordably.

Here’s the library of SaaS-related legal documents I consider essential whether being separate agreements or bundled as parts of a broader agreement.

1.  Non-Disclosure Agreements (“NDA”)

2.  Letters of Intent (“LOI”)

3.  Proof of Concept (“POC”)

4.  Interim Access Agreement (“IAA”)

5.  Independent Contractor Agreement (“ICA”)

6.  Intellectual Property Assignment (“IPA”)

7.  Master Services Agreement (“MSA”)

8.  Statement of Work (“SOW”)

9.  SaaS Subscription Agreement

10. Service Level Agreement (“SLA”)

11. Non-Compete

12. Non-Solicitation

13. Terms of Use

14. Privacy Policy and Data Processing Agreement ("DPA")

Let’s take a closer look at each of these documents individually. This article is not a substitute for legal advice.

1. Non-Disclosure Agreements (“NDA”)

A non-disclosure agreement ("NDA") regulates the disclosure of confidential information to a recipient and the recipient's use of such information. Generally, use is limited to a defined purpose in the NDA. An NDA can be one-way (i.e., regulating the protection and use of only one party's confidential information) or mutual (i.e., regulating both parties’ disclosure and receipt of confidential information). An NDA should never be signed without reviewing the terms. It is not uncommon for a proposed NDA template to be referred to as a mutual NDA; however, a number of provisions are in fact only beneficial for the party authoring the NDA. Further, other provisions such as non-competition and non-solicitation (i.e., no hiring of the other party’s employees) can be included in a template NDA and such provisions should generally not be accepted.

2. Letters of Intent (“LOI”

LOI are also referred to as Term Sheets, Heads of Agreements, and Memoranda of Understanding. Regardless of the names used for these documents, there are 3 general types:

• Non-binding,
• Partially binding, and
• Fully binding.

Let's have a look at the basic differences.

Non-binding LOI

A non-binding LOI is often a summary of potential deal terms with no commitments by either party. The aim of this document is often merely to ensure each of the parties understands the general framework of a potential deal, can "consider" accepting commercial terms as summarized subject to further discussion, and thus each party can iterate such document internally in order to obtain necessary approvals to move the discussion onward and hopefully upward.

A non-binding letter of intent may or may not be signed and often contains (and absolutely should contain) a "Confidential Information" designation on the document as well as language to the effect that: "This Letter of Intent is non-binding. Neither party shall bear any liability should the transaction contemplated herein not be completed."

Further, if the parties truly intend for the LOI to be non-binding, it is wise to exclude any language that the parties must "put forth good-faith efforts to conclude the deal based on the terms summarized in this term sheet" as this can create a binding component in some jurisdictions and thus create potential legal liabilities when there shouldn’t be any.

Partially binding LOI

A partially binding LOI may contain a non-binding summary of commercial terms but also incorporate other binding terms - such as: confidentiality, an exclusivity or standstill period (i.e., during which a party will not negotiate a similar deal with third parties), certain payments or a clarification that each party covers its own expenses, and a governing law and dispute resolution section which the parties accept as exclusively applicable. To clarify, the parties remain free to walk away from the transaction being considered; however, each party must comply with any binding obligations set forth in the LOI (e.g., secrecy, exclusivity, payments, etc.) or a breach of contract claim may ensue whereby the breached-upon party can take legal action pursuant to the laws, jurisdiction, and dispute resolution mechanism set forth in the LOI.

In a partially binding LOI, it is critical to clearly differentiate between which terms are non-binding and which are binding.

Fully binding LOI

In a fully binding LOI, the summary of commercial terms is often more complete and may be supplemented by high level legal terms. Moreover, there may be one or more conditions precedent that have to be fulfilled before the contemplated transaction becomes finalized (i.e., reduced to a final, signed agreement). If the conditions are satisfied and one of the parties nevertheless refuses to sign the agreement in question, there may be stated consequences in the LOI- such as, a financial penalty or long-tail non-competition undertaking, etc.

3. Proof of Concept (“POC”)

A POC agreement can be used to grant a prospective customer limited access to do one or more of the following with respect to SaaS: a) evaluate the stand-alone SaaS, b) evaluate some customized version of the SaaS, c) engage in some developments and testing of such developments in connection with the SaaS, d) demonstrate the SaaS or a customized version thereof for third parties (e.g. in the case of a potential larger delivery or resale to a third party customer), or even for testing of the SaaS in a beta environment or live environment, such testing at times being referred to as sandbox usage.

A POC is, in effect, a limited access right which is a precursor to a full commercial deal if the metrics defined in the POC are met. The aim is to keep the POC short in duration (generally no longer than 90 days) and promote the prospect’s familiarity with the SaaS in order to gain sales momentum. It is not uncommon to charge a fee for a POC and such fee is (in whole or part) can be credited later towards fees charged in connection with the full commercial deal. At times, a POC (a.k.a., limited use subscription or sandbox) can be free of charge to promote prospects being able to swiftly and affordably gain such limited access without any commercial strings.

4. Interim Access Agreement (“IAA”)

An IAA (also known as a Limited Use License or Limited Use Subscription) is similar to a POC; however, in the IAA scenario the prospect needs immediate access to your SaaS—prior to the time the full commercial deal is concluded. This is not uncommon when negotiating with large companies having relatively long contract closing lead times. Again, there should be a short duration for such agreements (not to exceed 90 days) and a fee charged for such access is advisable. The use should prohibit any commercial use absent concluding the commercial deal. The amounts paid can be credited (in whole or in part) toward fees accruing under the commercial deal. A key difference with the POC is that the prospect is actually engaging in use that can be implemented immediately after the definitive subscription agreement is signed.

5. Independent Contractor Agreement (“ICA”)

Many SaaS companies enlist the assistance of third parties (i.e., not employees) to provide technical development services as well as other services (e.g., marketing and sales support or customer success support). In such situations, it is critical that the third parties’ obligations and contributions to the company are captured in an ICA.

The main issues will be to ensure:

1) the third party performs as agreed under the ICA, 2) that all intellectual property produced under the ICA is assigned to your SaaS company, 3) that no third party intellectual property of any kind (whether open source or proprietary) is included in any deliverables without your company’s prior, written approval, 4) that the independent contractor is working within a third party company and is thus a separate and distinct company thereby not being construed as a misclassified employee for tax or other legal purposes.

Naturally, employment agreements for company employees are also highly relevant yet are generally more heavily regulated by local law (in this case, labor law). As a side note, if your company is actively seeking people to fill key roles, it is often very helpful to use a skilled recruitment firm to assist you. For executive and board roles within the Middle East, Asia, Europe, and North America, I can recommend www.gethunted.com. For specialists and mid-managers as well as volume recruitments within the Middle East, Asia, Europe, and North America, I can recommend www.awayketalentsolutions.com. Both companies regularly assist clients with strategic international recruitments and have representatives on the ground in Dubai, Egypt, Spain, Netherlands, United Kingdom, U.S., Norway and Sweden.

6. Intellectual Property Assignment (“IPA”)

An IPA can exist as a portion of another agreement (e.g., a paragraph in an ICA) or can be a stand-alone agreement. For SaaS companies, preserving at all times the ownership integrity of all intellectual property will be critical to meeting contractual obligations toward customers but also for continuously bolstering the valuation of the SaaS company and promoting investor/acquirer interest. In some countries, such as the United States, it is insufficient to merely state that your company will own all intellectual property developed under an ICA. It is, rather, required that there be an explicit assignment to your company, by the third-party company under the ICA including any of its implicated independent contractors, of all intellectual property developed in connection with the ICA. The assignment is, in essence, a property transfer, and therefore must be stated expressly in writing.

7. Master Services Agreement (“MSA”)

The MSA is the flipside of the ICA. Here it is your SaaS company that is providing services to a customer. In such MSA, a critical issue for your company will be to ensure that nothing that is developed (and required to be assigned to the customer) will stifle your company’s ability to develop and commercialize its own products and services in perpetuity. MSA should include an easy mechanism whereby customers can place (and your company can accept) orders for consulting and development services. It is not uncommon that MSA or sometimes referred to as “Professional Services Agreements” will be included as an appendix to a SaaS Agreement or Partner Agreement. The services in question are generally services that will promote your customer’s further leveraging of the SaaS subscription that such customer is procuring.

8. Statement of Work (“SOW”)

The SOW is the document attendant to another agreement, e.g., an ICA or an MSA, which operates as a specification of work, deadlines, system requirements, and other related terms pertaining to a specific service request and undertaking. It is important to clarify which document will take precedence if there is any inconsistency in terms appearing between the main agreement and the SOW.

9. SaaS Subscription Agreement

This is a core commercial agreement for your SaaS company. This subscription agreement will identify your SaaS service, clarify the rights and restrictions relating to the user, specify payment obligations (it is recommended to include the right to increase prices annually in accordance with a relevant index or other metric), warranties, limitations of liability, and termination rights. Of all the agreements mentioned in this article—this will be the agreement tailored specifically your SaaS offering context.

Some prospects of scale may push for the prospects’ SaaS procurement template to be used, and this should be avoided when reasonably possible. If such prospect draft agreement must be accepted, the agreement should be reviewed and modified as necessary to adequately safeguard your company’s business and legal interests and to furthermore ensure of sensible risk mitigation.

Some SaaS companies targeting the mass market take an approach akin to a EULA (End User License Agreement)—i.e., having a streamlined SaaS Subscription Agreement, various subscription alternatives, and payment specifications appearing as a landing page on a website. It is vital that any such SaaS Subscription Agreement is actively accepted (e.g., by including a scroll-down function on a website and at the bottom of the Agreement and including a tick-box). Furthermore, a version of the executed agreement should be emailed back to the signatory that is an authorized representative of the customer entity. With this said, it is not uncommon for prospective customers of scale to actively negotiate the terms of a SaaS Subscription Agreement, even if such document appears as standardized as a EULA.

10. Service Level Agreement (“SLA”)

Generally, it is not in a SaaS company’s best interest to offer all customers a service level agreement up front. With that said, many customers (especially licensees of scale) will demand an SLA which guarantees a high percentage of software uptime (often nearly 100% in the case of SaaS) and aggressive response and resolution times in the event of any major errors in the service. If an SLA is used, it is advisable to have the remedies set forth in the SLA (i.e., limited credits to be applied against future customer invoices) to be the exclusive remedy.

11. Non-Compete

Non-compete undertakings (a.k.a. covenants not to compete) are not uncommon in ICA in the event your company will be sharing sensitive information with independent contractors. With this said, many prospects/customers may attempt to impose non-compete undertakings even in NDA, LOI, POC, MSA, and the SaaS Subscription Agreements. It is imperative for every SaaS company to generally avoid accepting any non-compete undertakings as any such obligations operate to limit the SaaS company’s ability to conduct certain other business which may affect the SaaS company’s revenue, liquidity, profit, company valuation, and even attractiveness to potential investors and acquirers.

Note that any non-compete undertaking must comport to applicable law and must be drafted with care—in terms of duration and scope. In many jurisdictions, an otherwise permitted non-compete clause will be deemed invalid if stated too broadly. In other jurisdictions, courts will engage in “blue penciling” whereby the court re-writes the clause to capture the intentions of the parties for a reasonable duration and scope.

12. Non-Solicitation

A non-solicitation clause is essentially an undertaking not to attempt to recruit or actually hire another party’s employees and sometimes even independent contractors. A common exception to these undertakings is if a person applies for a job listing of general circulation. With that said, if your SaaS company is worried about losing key personnel as a result of some business collaborations, it is strongly advisable to impose a non-solicitation undertaking on your counterparties.

13. Website Terms of Use

Terms of use are the rules regulating what visitors to your website are permitted to do and are otherwise prohibited from doing. The terms of use should generally appear as a conspicuous and clickable hyperlink at the bottom of every website page.

14. Privacy Policy and Data Processing Agreement ("DPA")

Your company’s privacy policy informs any and all third parties (e.g., job applicants, business-to-business customers, and consumers) what personal data your company is collecting, for what lawful purpose the collection is being undertaken, and what rights such each such person has with respect to its personal data. The privacy policy should generally appear as a conspicuous and clickable hyperlink at the bottom of every website page. Further, a separate DPA will typically be required depending upon the SaaS subscription context and, as such, often appears as an appendix to the SaaS Subscription Agreement. 

👍🗼If you would like assistance, feel free to contact me directly at gary@b2world.com, +46(0)70 752 16 80. B2World offers package solutions for clients to onboard a best-practice, SaaS contract library efficiently and affordably.