Startup 101: Mastering Sales Agreements and Contracts

Navigating SaaS agreements can be daunting for any startup. These contracts are the backbone of business operations for SaaS providers, and when written well they foster trust and long term relationships between SaaS providers and their customers. As startup lawyers, at SPZ we believe that understanding the intricacies of SaaS agreements is crucial for any SaaS provider that wants to protect its interests, build a lasting relationship with customers, and ensure compliance with applicable laws.

In this comprehensive guide, we'll delve into why SaaS agreements matter, key terms to include, how best to address enterprise customers and individual users, data privacy considerations, intellectual property protection, and strategies for implementing your agreements in a sales-friendly manner. We'll also explore other essential legal documents that are critical for your SaaS business.

Table Of Contents

1. Why SaaS Agreements Matter
2. Key Terms for SaaS Agreements
3. Enterprise SaaS: Entities vs Users
4. Data Privacy Considerations in SaaS Agreements
5. Making Agreements Sales-friendly
6. Other Legal Documents That Are Just As Important

Whether you're a startup founder or an established SaaS provider, this guide will equip you with the knowledge needed to master your sales agreements, enabling you to focus more of your energy on ensuring the business operates smoothly and securely. Let's get started on mastering SaaS agreements and setting your startup on the path to success.

Why SaaS Agreements Matter

SaaS agreements are foundational documents that govern the relationship between SaaS providers and their customers. Here’s why they matter:

Defining Service Scope and Expectations:

At their core, SaaS agreements clarify what services are being provided, including specifics about the software functionality, availability guarantees, and support. By clearly defining the scope of services, SaaS agreements help prevent misunderstandings and ensure that both parties have a mutual understanding of what to expect.

Managing Risks and Liabilities:

SaaS agreements delineate the responsibilities and allocation of risk between the parties, and detail the procedures for handling disputes. This includes outlining what happens in cases of data breaches, service outages, or other disruptions. By clearly defining risks and how to address them, SaaS agreements provide some certainty for the harder moments in business relationships.

Protecting Intellectual Property:

SaaS agreements clarify ownership and usage rights of intellectual property, which is especially important when the platform is built in part on third-party intellectual property, or the customer is able to contribute or generate its own intellectual property through the platform.

Ensuring Data Privacy Compliance:

With the increasing importance and diversification of data privacy laws in the US and around the world,  led by trendsetting laws such as the General Data Protection Regulation (GDPR) and the California Consumer Privacy Act (CCPA), SaaS agreements must address how personal data is collected, stored, processed, and protected. SaaS agreements help SaaS providers comply with legal requirements and reassure customers that their data is reasonably protected.

Setting Payment Terms and Conditions:

Pricing models for SaaS products can vary widely, from subscription-based models to pay-as-you-go plans. SaaS agreements outline the payment terms, including fees, billing cycles, and renewal conditions. This ensures transparency and helps prevent payment-related disputes.

Facilitating Smooth Operations and Support:

Service Level Agreements (SLAs) within SaaS agreements specify the level of support customers can expect, including response times and resolution times for issues. By setting these expectations, SaaS agreements help ensure a high level of customer satisfaction and operational efficiency.

Enhancing Sales and Customer Retention:

Well-crafted SaaS agreements can be a selling point, demonstrating to potential customers that the provider is professional, reliable, and transparent. Clear and fair agreements can enhance customer trust and loyalty, leading to better customer retention.

In essence, SaaS agreements are vital for establishing a solid legal foundation for SaaS businesses. They are not just about compliance and protection; they are about creating a reliable framework that supports business growth, fosters customer trust, and ensures smooth operational dynamics. For startups, having robust SaaS agreements in place is a crucial step toward sustainable success.

Key Terms Related to SaaS Agreements

Intellectual property rights and data rights are among the most important subjects in most SaaS agreements. Here are some essential components to consider when drafting provisions around intellectual property and data rights for SaaS agreements:

Intellectual Property (IP)

Ownership and Rights:

The agreement should specify what intellectual property each party owns. Typically, the SaaS provider owns the IP related to the functionality of the platform, including any enhancements made over time. If the provider incorporates third-party IP, they should have the necessary rights to do so. Customers usually retain ownership of any IP they upload or create using the platform.

Joint Collaboration: 

In cases of joint collaboration, especially with features like generative AI, the agreement should clearly define ownership rights for jointly-created IP. This includes determining any restrictions on use and revenue sharing from the exploitation of joint IP.

Licenses: 

Each party needs a license to use the other party’s IP. The SaaS provider grants the customer a license to use the platform, while the customer grants the provider a license to use their IP as necessary to facilitate the platform. The license terms should define the scope, duration, territory, and any restrictions that may apply (e.g., no sublicensing).

Infringement Protection:

Each party should agree to indemnify the other party against third-party claims of IP infringement based on permitted use of the other party’s IP. This mutual indemnification not only offers legal and financial protection, but it also builds trust.

Data

Ownership: 

The agreement should distinguish between customer data (information uploaded by the customer) and provider data (typically aggregated analytics data, but potentially other data). The provider typically owns the aggregated data, which provides crucial insights for operating and improving the platform.

Licensing: 

Customers should grant the provider a license to use their data as necessary to provide and improve the platform, and for creating aggregate data. Conversely, the provider should grant a license to the customer if the platform provides access to provider data. As with IP, these license grants should include any restrictions on use.

Guarantees: 

Similar to IP, both parties should indemnify each other against third-party claims arising from the permitted use of each other's data. This is particularly important when third-party data sources are involved.

Personal Information

The provider’s handling of personal information must comply with applicable data privacy laws. The provider should address how personal data is collected, stored, processed, and protected, typically through privacy policies and data processing agreements. DPA’s are frequently (but not always) attached to the main agreement, while privacy policies are standalone documents for customers and end users to review.

By clearly addressing the key terms outlined above, SaaS providers and their customers can ensure a mutually beneficial relationship that promotes trust, transparency, and contractual protection.

Enterprise SaaS: Distinguishing between Entity customers and Their Individual Users

Even if a Software as a Service (SaaS) platform is designed for a B2B context, it’s crucial to address the individual people using the platform daily, often referred to as "authorized users." While the SaaS agreement is signed by the entity, it must clearly distinguish between the responsibilities and expectations of the entity customers and the authorized users. Failing to make these distinctions can lead to issues such as:

• Confusion over how to resolve disputes with an authorized user versus the entity.

• Conflicting requests from different authorized users.

• Unclear expectations for who pays for the authorized user access.

Here are three common approaches for structuring SaaS agreements to address authorized users:

1. Agreement with the Entity

In this setup, the SaaS agreement governs the use of the platform by both the entity and the authorized users but is only signed by the entity. The entity is responsible for ensuring compliance with the agreement by its authorized users. If an authorized user’s actions lead to a breach, the entity is held accountable.

Example: If an authorized user, Alex, uploads infringing content to the platform, leading to a lawsuit against the provider, the entity must defend and indemnify the provider against that lawsuit.

2. Agreement with the Entity and Terms of Service (TOS) with Individual Users

This structure includes two agreements:

• A SaaS agreement with the entity (just like the agreement in Scenario 1 above).

• Terms of Service (TOS) for each authorized user.

The TOS, agreed to by each authorized user, sets specific rules and restrictions for the authorized users, often including a code of conduct. This provides the provider with a direct contractual relationship with authorized users. The SaaS agreement should still grant the provider the authority to suspend authorized users, even without the TOS, but the TOS can give the provider additional cover to suspend/terminate individual accounts if necessary.

Example: If Alex uploads infringing content, the provider can suspend Alex’s account using its authority under both the SaaS agreement with the entity, and  the TOS with the Alex, giving the provider significant flexibility in managing its relationship with both Alex and the entity.

3. Agreement with Either Entity or Individual Users

This unified agreement caters to both individual users and entities, often used by newer providers with simpler operations or those providers attracting both individual and enterprise users. The agreement should distinguish between individual users acting on their own behalf and authorized users acting for an entity, and detail how each type of customer is responsible for compliance with the agreement.

Example: An individual user that is using the platform on its own might pay for its own account, while an entity will cover the cost of accounts for its authorized users. 

Strategic Considerations for SaaS Providers

SaaS companies must evaluate their operational setup and scalability when choosing an agreement structure. The unified agreement approach (number 3 above) may suit startups lacking the capacity to manage different agreements for individuals and enterprises. Aligning contractual frameworks with business goals helps establish robust customer partnerships and clear expectations for authorized users.

Data Privacy Considerations in SaaS Agreements

Data privacy is a critical component of SaaS agreements, as most SaaS providers collect a range of personal data through their platforms. Personal data can include obvious identifiers like names and addresses, as well as more nuanced information such as geolocation, biometric markers, and IP addresses. Essentially, any information that can be linked to an individual is considered personal data under applicable laws.

Data Privacy Law Landscape in the U.S.

In the U.S., data privacy is governed by a mix of federal and state laws. The federal laws are typically sector-specific, such as HIPAA for health information and GLBA for financial data. While there is no comprehensive federal law regulating all personal data across industries, the Federal Trade Commission (FTC) uses its authority to combat “unfair and deceptive” practices, often targeting companies that mislead consumers about personal data usage.

State laws, led by California's comprehensive data privacy law (the CCPA), impose requirements on businesses that meet certain size or activity thresholds. These laws mandate transparent privacy policies, robust technical protections, proper contracts with data vendors, and mechanisms for consumers to access their personal data. Additionally, states like Illinois and Washington have unique laws addressing specific concerns, such as biometric data and health information.

Strategies for Compliance

Given the complexity of the U.S. data privacy landscape, SaaS providers must adopt a strategic approach to compliance. Here are key steps to create an effective compliance plan that fits the circumstances and resources of the provider:

Data Mapping Exercise: Review your data collection practices, and be sure to cover the following key points:

• Identify who you collect personal data from.

• Determine what personal data is collected and for what purpose.

• Assess who has access to the personal data.

• Locate where the personal data is stored.

• Evaluate the security measures in place for the personal data.

Review Data Management Practices:

After mapping the data, work with an attorney to determine which data privacy laws apply and figure out what changes may be needed to bring your practices in line with applicable laws.

Risk/Cost Analysis:

Conduct an analysis to prioritize changes based on risk and cost, balancing compliance with financial and operational resources.

Implementation:

Implement prioritized changes to achieve as close to 100% compliance as your operational and financial resources will allow.

If a full compliance analysis isn’t immediately feasible, consider the following interim measures:

• Draft a Privacy Policy: Clearly explain your data management practices, including what data is collected, how it is used, disclosed, and how users can access it.

• Review Vendor Agreements: Ensure agreements with vendors processing personal data include sufficient protections.

• Appoint a Privacy Lead: Designate someone in your company to oversee privacy matters.

• Implement a Consumer Contact System: Set up a system for consumers to contact you with privacy questions and concerns.

Making Agreements Sales-Friendly

Customer agreements are critical for defining relationships and mitigating risks, yet overly complex contracts can impede sales processes. Crafting agreements that safeguard against risks while facilitating smooth deal flows is paramount for nurturing positive client relationships and minimizing unnecessary legal expenses. In this section, we explore sales-friendly approaches to drafting and negotiating SaaS agreements.

Drafting SaaS Agreements

Avoiding One-sidedness:

While it's crucial to draft agreements favorably for the SaaS provider, excessive one-sidedness can hinder deal progression. Balancing terms to be advantageous yet fair to both parties avoids unnecessary negotiation, accelerates the deal pipeline, and fosters trust between sales and legal teams.

Clarity and Readability:

Simplify language within agreements to enhance comprehensibility. Clear terms minimize the need for extensive legal review, particularly among smaller businesses. While larger enterprises will likely closely review any agreement they come across, accessible agreements reduce queries and objections, expediting the agreement process.

Consistency is Key:

Maintaining consistency throughout the agreement is essential. Avoid undefined terms, contradictory provisions, and misplaced clauses in order to prevent customer confusion, and reduce delays from customers seeking clarifications or requesting amendments. Clear definitions and consistent usage of terms enhance clarity and comprehension.

Order Forms:

Use an order form to outline key business terms (such as contract duration and pricing) to streamline negotiations. This enables the sales team to confirm essential terms before delving into the main agreement. If you do use an order form, make sure there is alignment between the order form and the main agreement.

International Considerations:

For SaaS products sold internationally, seek legal counsel in respective jurisdictions to ensure compliance with local laws and regulations. Proactive review by local legal experts minimizes delays and legal complications, facilitating smoother negotiations and quicker closures.

Negotiating SaaS Agreements

Alignment of Sales and Legal Teams:

Ensure alignment between sales and legal teams on acceptable edits to streamline negotiations. Clear delineation of acceptable, unacceptable, and occasionally acceptable edits empowers sales teams to handle negotiations independently, reducing reliance on legal teams and expediting the negotiation process.

Acceptance of Non-Substantive Edits:

During negotiations, willingness to accommodate minor, non-substantive edits from customers fosters goodwill and prevents unnecessary delays. Accepting typographical corrections or stylistic changes that don't impact contract meaning demonstrates flexibility and promotes smoother negotiations.

Allocate Sufficient Review Time:

Providing adequate time for legal review is critical. Rushed reviews increase the risk of overlooking crucial details, potentially leading to future issues. Allow ample time for thorough reviews to ensure comprehensive coverage of essential aspects of the agreement.

Sales-friendly Takeaways

Sales-friendly strategies in SaaS agreements streamline deal flows and cultivate positive client relationships. By aligning legal and sales teams, and prioritizing clarity and efficiency, providers can expedite negotiations and drive business growth in the competitive SaaS landscape.

Other Legal Documents That Are Just As Important

While a well-crafted SaaS Agreement forms the cornerstone of the relationship between SaaS providers and their customers, it may not comprehensively address all facets of this intricate relationship. Additional documents play a crucial role in defining the relationship between the parties and addressing legal compliance. Let's explore these supplementary documents:

Terms of Service (ToS):

As noted above, the ToS serves as a vital link between SaaS providers and individual authorized users. It delineates the rights and responsibilities of users, places limitations on the provider’s liability to users, and usually includes a code of conduct that prohibits unwanted actions like uploading obscene content.  Although some providers opt to incorporate certain ToS clauses into the SaaS Agreement, or even house the ToS and SaaS Agreement within a single document, a standalone ToS can directly communicate with authorized users, tailoring language for better comprehension and acknowledgment of unique rules.

Privacy Policy:

Mandatory under data privacy laws, the privacy policy explains how SaaS providers handle user personal data. As discussed above, this document outlines data collection, usage, disclosure, and protection practices. Given the potential repercussions for violations of applicable data privacy laws, dismissing the privacy policy as an afterthought is unwise.

Data Processing Agreement (DPA):

In scenarios where SaaS providers process user data on behalf of customers, DPAs are a standard, and expected, contract between providers and their company customers. DPAs are required by many of the most well known data privacy laws (including the GDPR and CCPA). These agreements entail contractual promises from providers regarding the handling of personally identifying information, and most customers won’t sign the SaaS agreement unless the DPA is also signed. While some DPAs adhere strictly to legal requirements, others impose onerous obligations on providers that aren’t legally required. Careful review is essential to ensure alignment with the provider's capabilities.

Statements of Work (SOW):

For SaaS providers offering custom development services, SOWs confirm details on project scope, deliverables, ownership, timelines, and fees. The flexibility of SOW structures enables parties to address unique projects as they come up, rather than as part of the broader negotiation process for the SaaS agreement.

By supplementing the SaaS Agreement with these essential documents, providers can address key aspects of the relationship that aren’t always covered by the SaaS Agreement, foster compliance with legal requirements, and mitigate risks associated with the complex SaaS landscape. These agreements not only bolster the legal framework but also contribute to building trust and fostering positive relationships between SaaS providers and their customers.

Key Takeaways: Getting Your SaaS Agreements in Place

Establishing robust contractual relationships between providers and customers is paramount. A well-drafted SaaS Agreement serves as the linchpin of this relationship, setting the tone for collaboration, defining rights and obligations, and mitigating risks. Here are the key takeaways from our exploration:

Foundational Role of the SaaS Agreement:

• Defines terms and conditions governing customer access and usage of the SaaS platform.
• Establishes rights, responsibilities, and liabilities for both providers and customers.
• Serves as a cornerstone for building trust and fostering positive client relationships.

Importance of Supplementary Documents:

• Terms of Service (ToS) speaks directly to authorized users, clarifying rights and responsibilities.
• Privacy Policy is necessary for compliance with data privacy laws, and communicates to users how the provider is safeguarding user personal data.
• Data Processing Agreement (DPA) outlines provider commitments regarding the handling of personally identifying information, and customers won’t agree to a SaaS agreement unless a DPA is also signed.
• Statements of Work (SOW) delineate project scope, deliverables, and ownership rights for custom development services.

Strategic Considerations for Drafting Agreements:

• Balance between protecting provider interests and maintaining sales efficiency.
• Clarity and simplicity in language to enhance comprehension and streamline negotiations.
• Alignment with legal requirements and industry standards to ensure compliance and mitigate risks.

Importance of Alignment Between Sales and Legal Teams:

Collaboration between sales and legal teams to expedite negotiations and streamline deal flows.

Alignment on acceptable edits and negotiation strategies to minimize friction and delays.

Strive for Clarity, Efficiency, and Compliance:

Clear delineation of rights, responsibilities, and liabilities to foster transparency, trust, and efficient negotiations. Compliance with legal requirements to mitigate risks and safeguard against potential liabilities.

By crafting agreements that prioritize clarity, efficiency, and compliance, SaaS providers can establish strong foundations for successful partnerships with their customers and navigate the evolving regulatory landscape with confidence.

Ensure compliance with regulations while protecting your interests. SPZ Legal specializes in providing tailored legal solutions for SaaS providers, empowering you to navigate negotiations with confidence and optimize your deal flows.

Contact SPZ Legal today to discover how we can support your business in crafting agreements that strike the perfect balance between protection and efficiency, laying the groundwork for successful partnerships and business growth in the dynamic world of SaaS.