Everything You Should Know About the SaaS Contract

By Kishana Citadelle
Updated: July 7, 2022, first publication: November 2021
definition backgroundEverything You Should Know About the SaaS Contract

Properly designing or negotiating a SaaS contract allows you to make the best preparations to market your software product or benefit from its service efficiently and safely.

Whether you are a software provider or a customer, it’s important to understand the main terms and conditions to obtain a suitable contract. This way you can protect yourself in case of litigation and most of all avoid any unpleasant surprises.

So, what are the essential terms and conditions for SaaS contracts? Let’s find out!

What is a SaaS contract?

A SaaS software contract, otherwise known as a software as a service agreement, is first and foremost a service contract. Generally, it includes the various parties involved with the software:

  • The software vendor/publisher
  • The hosting service
  • Clients 

The contract establishes a business relationship between the client and the supplier regarding the privacy policy, usage requirements, user restrictions, termination, and potential geographical policies.

Overall, it provides transparency on what to expect when using the service, as well as helps to stay informed on any future updates.

What to look for when reviewing a SaaS agreement?

A SaaS agreement should serve as terms for mutual business between the provider and the customer. It should protect both parties. For SaaS providers, it helps ensure that the user is using the services correctly while holding them accountable if they have misused or violated the terms and conditions.

In addition, the user may have to follow certain agreements and clauses like:

  • Service-level guarantees,
  • Licensing requirements: how the user accesses a service, or how providers would like them to purchase, use, manage their service, etc. Providers take into consideration the subscription type, whether it will be as a trial, demo, or, under a lease or subscription. Also, the provider should always remember to include the expiration date!
  • Local/Regional compliance: Under a SaaS contract, it can be a good idea for customers to ensure that their provider's service is compliant with any local data regulations, such as the CCPA (California Consumer Privacy Act) or the GDPR (General Data Protection Regulation) in Europe.
  • Terms of use 
  • ​​Reversibility clause: It can be important to include a reversibility clause in the Terms and Conditions. Within the framework of a SaaS contract and IT, this is the ability for clients to recover their data at the end of the contract or migrate the data to another service. Although, they aren't commonly included.
  • Data storage regulations
  • Potential restrictions

If you’re a client with sensitive data, it could be beneficial to check and be aware of how the vendor plans on using your data. Good ideas of questions to ask the software publishers could be:

  • What the vendor means by “data storage”?
  • How will my data be collected?
  • The type of data that the vendor will collect
  • How long will my data be kept for?
  • And will that data be erased once your contract with them has been terminated?

These simple questions will help avoid any future misunderstandings on both sides of the contract.

Is a SaaS contract agreement a license?

Contrary to popular belief, they are not the same.

Usually, a "standard" or on-premise software is installed directly on a computer from a hardware medium (installation disk, for example). As it is physically installed, the contract gives a customer the right to use the software package in exchange for the purchase of a license. In this case, the company will distribute the software for a set or fixed period, normally in exchange for a single lump sum or monthly fee.

While in a SaaS agreement, the software services are delivered through the cloud. The customer gains access to them online, making their service directly accessible and usable generally through web browsers or dedicated applications. It doesn’t involve the purchase of a license, and is more flexible and affordable than a software license contract:

  • It is accessible remotely and immediately through a web interface, generally without downloading or installation on the client’s own machines;
  • It does not require storage space because the data is saved in the cloud;
  • Updates and maintenance are managed by the provider;
  • It offers scalable and à la carte pricing, depending on the needs and uses of the company purchasing the service.

☝️ Their use-cases are therefore different: licenses relate to the right to use the software while SaaS contracts define the terms and conditions of using a service.

The essential clauses of a SaaS contract

With SaaS software, publishers have control over the entire service, including the data and the information systems infrastructure.

As such, the contract is of vital importance in defining the scope of the service provider's involvement and the usage rights of the service over a given period.

Here are the main points to take into account during your negotiations.

Subscription

As we established, the customer does not pay for a license and therefore takes out a subscription. The contract determines the terms of the chosen subscription, including:

  • the rates,
  • the payment terms,
  • the frequency of payments, etc.

We’d recommend finding out in advance what the pricing includes. Additional costs may be incurred for certain overruns that occur after the contract is signed (e.g. storage, premium support, API calls, etc.).

Service performance

A clause dedicated to application performance can be included to guarantee a short response time. For example, several network connections can be provided with the SaaS application to limit slowdowns.

To protect themselves, the service provider may also insert a clause to inform the customer of potential Internet hazards or issues that may lead to lower performance or service interruption.

Service availability and updates

The availability of the service and maintenance must also be included in the contract. An added clause such as this one works to ensure the service provider is committed to the 24/7 availability of the SaaS software for the customer. 

Although in reality, most companies tend to have 99.9% uptime. Which is probably all you’ll need!

This same clause should include details on maintenance-related interventions, such as:

  • the frequency of updates provided by the software publisher,
  • expected response times for handling outages, crashes, and other technical problems,
  • the technical assistance provided.

Ideally, the provider will warn the customer of any scheduled interruptions at the risk of being held responsible for the possible consequences.

Data ownership/security

These clauses ensure the highest security of the service and the client’s data. In general, they stipulate that the parties (especially the provider) agree to implement the following actions according to specific aspects:

  • They respect data integrity,
  • They protect the confidentiality of the data used and stored within the service,
  • Sensitive data encryption,
  • They can provide data traceability, etc.

The provider is responsible for implementing measures to limit fraudulent use of data and to prevent loss or corruption of client data.

Support

It is essential to work with a provider that offers support, in case any malfunctions were to happen. 

Some companies offer 24/7 customer service via phone or email, while others only provide support during certain business hours and only through certain means (email only, etc.).

💡 Clients should ensure that their subscription plan offers the amount of support that the business needs

If the software provider offers support by phone, it is important to identify the availability of their customer support representatives, especially if there is a substantial time difference between the provider and the customer.

The list of clauses is not exhaustive and will depend on the type of SaaS contract. Always check the conditions and stay informed of any updates.

Important considerations in a SaaS software contract

Defining relevant terms

When entering into any agreement, it's important to first define what you mean by terms like "solution", "software", "user", or "provider", as well as all technical terms in a precise and clear manner.

Likewise, including a detailed description of the purchased services records their characteristics. This makes it possible to refer to them if changes are made to the product during the subscription period.

Make sure to use unambiguous language in any written agreement or contract. For example, software publishers should avoid terms like "license", which could lead to confusion in the event of litigation in court.

SaaS contract template

To help you draft or negotiate a SaaS contract, you can use examples or online resources.

For example, the American Bar Association (www.americanbar.org) provides a SaaS contract template in .doc format. The SaaS Agreement Template is available for download below.

Final tips

Our list is not exhaustive and agreements and clauses often depend on the type of SaaS contract.

As a general rule, paying particular attention to the following points will help limit risks and costs:

  • Is the technological architecture of the SaaS product multi-tenant or single-tenant?
  • Are data processing and confidentiality assured?
  • Do the IT systems meet the highest security standards?
  • Are the commitment and termination terms flexible?
  • Does the cost reflect the actual use of the solution (especially its scalability based on the number of users)?

When a contract is particularly complex, legal expertise should be sought to protect against any risk. Lawyers and other legal experts will be able to draft adapted and personalized clauses while keeping in mind the legal considerations in compliance with any related regulations.

Transparency is an essential value for Appvizer. As a media, we strive to provide readers with useful quality content while allowing Appvizer to earn revenue from this content. Thus, we invite you to discover our compensation system.   Learn more
Definition backgroundSaaS Companies: You Can't Ignore NRR Anymore, Here's Why
Definition
June 14, 2022
SaaS Companies: You Can't Ignore NRR Anymore, Here's Why
The net retention rate is a metric that is increasingly used by companies that operate on a recurring business model. Discover what NRR is, how to calculate it, and why it's essential for your business!
Tip backgroundInternational SaaS Strategy- Do's and Don'ts
Tip
October 4, 2021
International SaaS Strategy: Do's and Don'ts
Deciding to move your SaaS startup can be a hard and demanding task. Are you looking to take your business to the next level? Take some time out of your day and find out the answers to these questions and steps your SaaS startup has to take to move towards a successful and profit producing global expansion.
Definition backgroundWhat Is SaaS as a Part of Cloud Computing?
Definition
December 24, 2020
What Is SaaS as a Part of Cloud Computing?
SaaS, or Software as a Service, is a model for making software and applications available remotely, via the cloud service. Examples and advantages.