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SaaS adoption continues to expand, becoming an integral aspect of organizations. As of 2023, a company with an average of 500 to 1000 employees uses around 300 - 400 SaaS applications, according to CloudEagle’s SaaS spend report.
With the growing need for SaaS solutions, the significance of a meticulously crafted SaaS agreement cannot be overstated. SaaS agreements are an essential aspect of the purchase process. When properly termed, discussed, and executed, they protect all involved parties. However, mishandling these agreements can lead to significant repercussions.
SaaS agreements are more than legal documents; they form the foundation of your business or vendor partnerships. So, it is critical to understand the key clauses that you must not miss in a SaaS agreement. Ignoring these can lead to significant financial hassles and legal implications.
To help you avoid the adverse impacts of unfavorable SaaS contracts, here is a list of the critical clauses you must pay attention to while signing a SaaS agreement.
What is a SaaS agreement, and why is it important?
A SaaS agreement is essential for establishing a simple and structured connection between the vendor and the SaaS buyer.
A SaaS agreement is a legal document that outlines the terms and conditions of a SaaS provider's relationship with its customers. It specifies the terms of service, software access rights, and the subscription model, ensuring all parties know their respective roles and duties.
Typically, the agreement addresses service level agreements, data security, and compliance requirements.
Why is a SaaS agreement important?
- Accountability and clarity: Provides a written record of expectations and commitments that can be used as a reference by both parties.
- Software Access Rights: It outlines the scope of software services and the corresponding customer subscription charge.
- Usage Guidelines and Protections: Protects the SaaS buyer by clearly defining software usage restrictions to prevent unauthorized usage or unlawful activities, thereby reducing potential legal risks from vendors.
- Risk Mitigation: Use liability limitation provisions to safeguard the enterprise from the negative effects of data breaches and piracy attempts.
- Licensing: It helps the buyer prevent legal disputes and financial concerns when licensing cloud-based software.
- Compliance: Ensures that both parties adhere to relevant laws and regulations.
Key Clauses in a SaaS Agreement
As stated above, the ideal SaaS agreements must have specific key clauses for a well-informed contract signing process. Let us have a look at the key clauses:
1. Agreement scope
The scope of the agreement clearly defines the boundaries and constraints of the services offered and the precise functionalities and features covered by the agreement.
A SaaS agreement's Scope of License typically includes:
- Authorized means of obtaining and using services
- Permissible SaaS services and the scope of access
- Number of permitted users or access restrictions.
- Specific business areas or markets may be subject to restrictions.
- How users can utilize the product with each change in scope and permissions granted.
Access clauses are essential in modern SaaS contracts because products are often not offered through a traditional licensing setup in which software copies are maintained on user devices.
The Clickup SaaS service agreement clause describes the terms related to the provision and use of the downloadable client software as part of the service.
It contains information on the license provided to the user for the usage of the software, underscoring that the license is not a sale of the software and that the business retains all rights, title, and interest in the software.
Furthermore, it imposes constraints on the user, outlining acts that are not permitted concerning the software, such as copying, reproducing, changing, or distributing it.
Sailpoint’s agreement scope clause is another excellent example. It specifies the parameters under which the consumer can access and use the SaaS services. It highlights the customer's non-exclusive, non-assignable, and internal business usage restrictions, stressing the rights granted under the agreement.
Sailpoint's agreement scope clause is a great example. It clearly outlines the terms for how customers can access and use their SaaS services. It highlights that customers have non-exclusive, non-assignable rights for internal business use under the agreement. This straightforward approach helps the provider and the customer work together effectively in their SaaS partnership.
2. Subscription and pricing plans
Subscription and Pricing Plans clause in a SaaS license agreement mainly covers the
- Vendor's subscription details
- Pricing structure, and
- Service delivery.
This section of the SaaS license agreement typically describes the charges, payment frequency, and payment method.
The subscription details are specified in the contract, including the exact services provided by the SaaS vendor and their manner of delivery. Payment terms, such as frequency and method of charge, are also specified explicitly.
Most SaaS contracts include monthly, quarterly, or annual payment periods. However, there are various SaaS pricing models, including flat-rate, usage-based, tiered, per-user, and per-active-user pricing.
This Subscription clause of the Kissmetrics SaaS license agreement describes the services offered in each plan, the subscription period options, the automatic renewal procedure, and the way to access specific plan data.
This clause clarifies the subscription terms, payment cycle options, and process for renewal or cancellation, all of which are critical components of a SaaS agreement's Subscription and Pricing Plans clause.
Auto-renewal has been mentioned in the clause, so you can negotiate to cancel the auto-renewal clause to avoid hidden expenses.
This payment clause of Asana’s SaaS service agreement is also an ideal example of a subscription and pricing plan. It clarifies the payment terms, including the payment deadline, the consequences of late payments, and the potential interest or collection costs.
The clause specifies the framework for end-user subscriptions, including the framework for subscription costs and the conditions for adding or dropping end users.
3. Service Level agreements
A SaaS service level agreement (SLA) can be used as a stand-alone document or as part of an elaborate SaaS provider agreement. It specifies the extent of support and service a SaaS provider commits to offering the customer.
The software's uptime percentage is crucial and frequently expressed as a benchmark of 99.9% or, more commonly today, 99.99% uptime. (means only 0.1% downtime.)
Other critical aspects of the SLA include time to respond to time-constraint issues, penalties for failure to comply with guarantees, billing and pricing structure, security and compliance measures, and particular performance metrics and key performance indicators (KPIs).
The SLA is a thorough legal contract explaining the responsibilities of the SaaS seller and the buyer, ensuring that the software provided meets the buyer's needs.
The SaaS service level agreement clause in Monday.com specifies the uptime guarantee and priority support capabilities available to Enterprise Plan or higher tier customers. The clause defines the SaaS Service Level Agreement (SLA) and states that any terms and conditions not mentioned in the SLA are as outlined in Monday.com's Terms of Service or any other agreement between the parties.
Cloudflare, in its SLA agreement, states it will have 100% uptime and also states that it will offer a financial remedy if, by chance, it fails to upload the uptime. Moreover, it states that if there is downtime, Cloudflare offers a formula for calculating a service credit.
4. Data ownership and security
Both vendors and users will generate large amounts of sensitive data when using software. A data ownership and security clause is critical for clarifying the ownership of data gathered by the software company, especially given the SaaS providers' role in storing client data.
It is critical to understand how data is stored, transported, and retrieved and any security constraints. The SaaS license agreement must include a privacy policy outlining data protection, third-party access, and the provider's data usage procedures.
This section should also provide information on data encryption, backup mechanisms, and how the supplier handles security breaches.
The Data security and privacy clause in the Axosoft contract addresses data ownership and security. It clearly states consumer data ownership, stating that the customer retains all rights to the data. It also outlines Axosoft's rights to utilize client data solely for defined objectives relating to the system's operation.
The clause further stresses the customer's responsibility regarding sensitive data, regulatory compliance, and the security of user identities and passwords. It also emphasizes Axosoft's responsibilities in preserving the security, integrity, and accessibility of the system and its network and the right to suspend access if necessary to maintain security.
5. Liability
The Limitation of Liability (LOL) clause protects the vendor against potential compensating claims in the event of contract breaches. This provision, included in the final agreement, limits the buyer's ability to demand particular damages if the SaaS service fails, thereby shielding the vendor from legal ramifications.
The Limitation of Liability section is designed to address the specific risks related to each SaaS product. This clause is commonly found in conventional vendor agreements, often benefiting the vendor and limiting the maximum damages for which the vendor may be liable.
Essentially, the clause functions as a disclaimer, accompanied by a statement limiting the total damages for which the vendor may be liable under the contract.
In Redocly's agreement, the provided clause effectively describes the liability restrictions in a SaaS contract. It indicates how Redocly and its affiliates cannot be held liable for any potential damages or losses sustained by the customer or third parties.
The provision addresses a variety of eventualities, including system failures, data loss, disruptions, and security breaches. It also addresses the provider's liability for consequential, incidental, and punitive damages.
The Microsoft agreement is an example of a comprehensive limitation of liability clause in a SaaS contract. It establishes the maximum recoverable damages, excluding incidental losses and lost profits or income. These restrictions apply even if the remedy does not fully compensate, and Microsoft is not liable for uncontrollable situations.
The clause emphasizes Microsoft's commitment to mitigating the impact of such occurrences and carrying out unaffected duties, giving clarity and protection to all parties involved in the SaaS license agreement.
6. Termination and auto-renewal
SaaS contracts typically last one to five years, with longer contracts resulting in an 8.5% termination rate.
As per Devsquad research, Multi-year contracts of around 2.5 years in length or more have an average churn rate of 8.5%.
This clause serves as the contract's lifeline, laying forth the terms of the agreement and the procedures for renewing, suspending, or terminating the account. Most SaaS companies now favor evergreen renewals, which automatically renew the agreement unless the subscriber cancels it before a certain date.
In addition to those mentioned earlier, this clause includes terms about SaaS pricing. These provisions detail the customer's chosen subscription plan, model, and pricing.
It also specifies the type of subscription pricing model, the subscription tier, the payment schedule, and the amount to be paid each billing cycle to avoid any confusion between the parties.
The termination and auto-renewal clauses in Hubspot's agreement are comprehensive and straightforward. It sets the initial subscription duration and the automatic renewal process based on the subscription term or one year, whichever is less.
The clause further describes the procedure for sending notice of non-renewal, including how such notice can be sent. Furthermore, it instructs users to disable auto-renewal via their account settings or specific actions outlined in the knowledge base article.
The termination and renewal clause of Chattermill's agreement is clear and covers all important elements. It describes the start of the agreement, the automatic renewal procedure, and the criteria for terminating the agreement.
It outlines the possibilities that could result in termination, such as the expiration of a trial term, mutual termination with prior notice, or termination in accordance with the clause's requirements.
7. Customer support and maintenance
The SaaS agreement's customer support and maintenance provision specifies the accessible support channels, which include a dedicated help center, an email ticketing system, and phone support during business hours. It indicates the desired response time as well as the team in charge of handling client concerns.
The clause also includes support services and maintenance provisions, outlining any applicable service guarantees. This comprehensive provision assures that the SaaS vendor is committed to delivering timely and effective support for their services.
The customer support and maintenance clause in Xero's agreement emphasizes the business's commitment to maintaining service availability and providing 24/7 online support.
It also accepts the necessity for periodic service maintenance, with efforts to minimize any ensuing downtime. The section also addresses the aim of notifying users before planned maintenance; however, it notes that such advance notification cannot be guaranteed.
This is an ideal example of a customer support and maintenance clause in the SaaS license agreement of ProcurePro. It states the supplier's commitment to providing routine improvements, bug fixes, and technical assistance without additional expenses during specified hours.
It also defines the limitations of the support services, such as services beyond the scope, unauthorized modifications, and hardware-related concerns. Furthermore, it emphasizes providing specialist services at the supplier's professional rates, ensuring clarity, and specifying both sides' duties in the SaaS license agreement.
8. Product Modifications
Product Modification clause in a SaaS agreement specifies the provider's right to modify or stop the software, including any related plans and pricing, with or without advance notification. It also describes the procedures for contacting customers about changes in functionality, pricing, or terms of service.
This clause is important because it notifies customers of prospective product and pricing changes, ensuring transparency and managing expectations.
This clause usually includes measures for informing consumers about system maintenance, service disruptions, and changes to subscription plans. It also emphasizes the provider's limited responsibility for any changes, pricing increases, or outages to the SaaS app.
Moreover, these clauses protect the provider's flexibility in adapting the product while also expressing clear expectations for users about prospective modifications.
The Product Modification clause mentioned above permits the Databox App provider to make changes or stop the app as they see fit. However, also state that they will provide notification to the users for major changes. It further states that prices and plans are subject to change, and the vendor is not responsible for any resultant changes or disruptions.
The Dropbox modification clause permits the organization to modify the terms to comply with legal changes or to improve the service. It further states that users will also be notified in advance, and if they disagree, they can terminate their accounts before the changes take effect. Continued use of the services signifies acceptance of the amended terms.
CloudEagle for managing sensitive SaaS agreements
A SaaS agreement is critical documentation that shouldn't be overlooked, which is why we prepared this SaaS agreement key clauses checklist to keep you informed of the key elements to include.
Accurately managing SaaS contracts requires a comprehensive platform; this is where CloudEagle can be helpful.
CloudEagle provides a complete solution for managing sensitive SaaS contracts, ensuring effective monitoring through contract management and optimization modules. With CloudEagle, you can automate tedious tasks, allowing for easy purchase, renewal, and monitoring.
Custom fields are available to increase the functionality of the platform, helping you to accommodate more data in your contracts and store it in one secure location.
Failure to pay attention to SaaS agreement clauses can result in financial challenges, disruptions in service, unforeseen costs, and various other complications. The eight essential clauses highlighted in this article will empower you to make informed choices before signing SaaS agreements.
Good Luck!
