Software Deals Using the Customer’s Form

Ever try to license software or provide SaaS to a Fortune 500 company or some other high profile company? Did they insist on working from “their paper”? You know enough not to simply hope for the best and sign whatever contract they put in front of you, but you also don’t want to delay further a months-long sales effort over the paperwork. What do you do?

The Customer’s Form Contract

You want the deal, so you tell them to send you the draft. BigCo sends you its contract. It’s a long, complex document that rivals the King James Bible. You send it to your lawyer, who spends an hour or two reviewing it. The lawyer comes back with a list of concerns that go something like this:

  • The intellectual property terms don’t apply to the deal you’re trying to close. You simply want to provide access to your SaaS platform, and the contract has your company assigning over all of its IP – effectively preventing you from offering a SaaS platform to your other customers.
  • The security terms are totally overbearing. You’ll only receive publicly available, anonymized information, but the contract has your company submitting to monthly penetration tests, annual SOC 2 Type 2 audits across all five principles, and background checks on all your employees by a third party of your customer’s choosing.
  • The renewal and termination provisions give your customer a right to terminate at any time, for any reason, with a pro-rata refund.

You then call your counterpart at BigCo and negotiate the renewal and termination provisions, while your lawyer rewrites the intellectual property and security terms. You’ve now spent your own relationship capital negotiating a key term, you’ve spent money on legal expenses, and the revisions haven’t even been sent to your customer’s attorney yet. Worse still, you’re beginning to wonder why they sent over a contract that requires this much hassle.

Here’s the problem: When they told you they wanted to work from their paper, you felt like you were in no position to negotiate. You spent a long time to get the deal to that point, and the economics were finally set. Your counterpart may have even said, “Our legal can be a pain. I don’t like having to deal with them, but it’s how we do things at BigCo.”

A Better Way Forward

Assuming you are even willing to work from their form, consider an alternative. Imagine instead that you told your counterpart at BigCo, “Certain legal items are really important to us. They are X, Y and Z. If we can work from a contract with those included, I’m confident the lawyers can hammer out the rest and we can quickly get this deal done.”

So what are X, Y, and Z? Here’s a sample of issues that are critical in many software deals:

  • Intellectual Property – Are you assigning your software (literally giving the code and full ownership to your customer), licensing it and reserving ownership rights to yourself, providing user access to a SaaS platform, or something else?
  • Data – If you’re providing a SaaS platform, who is responsible for the content of the data uploaded into it? Who owns it? What can (and can’t) you and your customer do with it?
  • Termination – Under what circumstances can your customer terminate the agreement?

Obviously that’s not an exhaustive list, and critical issues vary from deal to deal and company to company. Ideally, you already know your X, Y and Z.

When you communicate key legal concerns the moment you are willing to concede on using their paper, you send some important signals to BigCo:

  • You’re willing to work with them if they’re willing to work with you.
  • You know that the legal terms matter, and you know which issues are especially critical for your deal.
  • You want to learn quickly whether they will insist on dealbreaker terms.
  • You will expedite the process to get the deal done.

If your counterpart at BigCo also wants to get the deal done soon, your message will reach BigCo’s legal department. And if BigCo’s legal department takes cues from your counterpart, you’re much more likely to receive an agreement that actually applies to your deal. This saves everyone time and money in the long run.

But suppose your counterpart doesn’t want to close quickly or doesn’t relay your message, or suppose the legal team doesn’t take cues from your counterpart. Suppose the contract you receive from BigCo’s legal department isn’t any better. Are you really any worse off than if you had not tried this approach?

A Company Sale NDA is Different

A common misperception is that all Confidential Disclosure and Nondisclosure Agreements (NDAs) are virtually the same. In other words, many people think that it doesn’t matter whether an NDA is for a vendor, customer, employee, strategic, or potential sale transaction—a standard NDA should be sufficient. The truth is, they are and should be different. This is especially true in the company sale context.
Here are some ways that company sale NDAs can be different:

(1) Definition of confidential information

The description of what constitutes confidential information in typical NDAs does not include a number of things that a seller often wants kept confidential in the sale context—most notably, the fact that the seller is considering selling the business or that the buyer and the seller are interested in a sale transaction.

(2) Permitted use of confidential information

A general use restriction seen in “standard” NDAs is often insufficient as a limitation on use of confidential information shared in the company sale context. Moreover, if the buyer is in private equity or is another type of financial sponsor, a limitation on using the confidential information only in connection with the consideration of a potential acquisition of the seller may not be adequate. It often does not limit the disclosure of confidential information to other potential buyers as part of a “clubbing” deal, which sometimes is counter to the seller’s desire to create competition among suitors.

(3) Who the buyer can share the information with

Many NDAs typically restrict disclosure of information by the recipient to those within the recipient’s organization who “need to know” for the stated purpose. Often, in the company sale context, buyers need to also share that information with financing sources, investment bankers, transaction consultants, lawyers, and others.

(4) Non-solicitation of seller’s employees and customers

While it is uncommon to see restrictions on solicitation of a party’s employees and customers in the typical NDA, it is more common to see the matter covered in a company sale NDA as those relationships are more vulnerable in the sale context, especially if the employees and customers know that the seller is interested in selling.

(5) Antitrust requirements

If the buyer is a competitor, provisions and processes should be included that address antitrust concerns.

(6) Seller point person

It is somewhat common to see an individual within the seller’s organization designated as a point person for whom the buyer must work through to obtain confidential information. The intentional procedural bottleneck is designed to ensure that relevant people within the seller’s organization are appropriately briefed, that certain people within the seller’s organization are not contacted by the buyer, and to some extent, keep track of the confidential information that is disclosed.

(7) Seller’s form of NDA

A common issue in many commercial transactions is whose form NDA should be used. In the company sale context, however, use of the seller’s form of NDA is the norm. Also, it is more common to see the NDA in the form of a letter, countersigned by the potential buyer, rather than the standard form of two-party agreement.

Because of some of the unique issues that arise in company sale transactions, sellers should craft the form of NDA they use with those unique issues in mind and not rely on forms or templates used in other contexts.

Closing the Software Deal

Is your software deal stuck in legal limbo?  Need to get it closed to ‘make numbers’ before EOQ?  If your company offers SaaS or licenses software to other businesses, consider these three tips to close deals with less legal hassle.

Don’t bury the lead

SaaS agreements and licenses that do not make the fees obvious to your customer’s counsel do no one any favors.  If the deal means your customer will pay you $25,000 or less per year for three years, and their legal counsel can quickly see that, counsel will very likely treat it accordingly – hopefully with a lighter touch than a deal 20 times that size.

If you instead bury the dollars and cents deep in the agreement, or worse still – put them on a separate file your customer’s lawyer never receives – the lawyer may be more likely to spend more time and more money aggressively negotiating with you.  $25,000 worth of negotiation for a $75,000 deal makes no sense.  For large deals, expect a thorough review no matter where you put the financial details.  But don’t encourage your prospective customer to spend more on legal expense than makes sense relative to the deal size.

Also, take a moment to describe your platform in the agreement.  In my experience, agreements from some hot names in tech right now lack minimal descriptions of their platforms.  If your customer’s attorney knows nothing about the offering, you’re much more likely to wind up negotiating issues that are totally irrelevant to your deal.  That’s nuts.  Take a moment to describe the offering, if only at the most basic level.  You will save your team and your customer valuable time and legal expense.

Know your market

Are you selling into a regulated industry?  If so, do you know what regulatory burdens your customers face, and if they’re changing?  Does the platform you’re pitching impact your customer’s ability to comply?  If you don’t know the answers to these questions, you’ll find out sooner or later – perhaps painfully.

For example, if you’re selling into the healthcare industry, you should know whether your offering will impact your customer’s ability to comply with HIPAA.  You should know what a BAA is, and you should be prepared to answer why your company will or will not sign one.  Another example . . . if your offering will gather information from people residing in the EU, you should be aware of European privacy law and potential changes that may impact you and your customers.

Don’t wait until your customer’s counsel brings up these and other market-specific issues during negotiation.  Draft a deal that accounts for them and be prepared to explain your thinking.

Plan for what comes next

If you’re like most in the software business, you live and die with churn and LTV.  You’re much less likely to see positive movement on those metrics if you don’t have a clear plan to ensure customer success with your software or platform.  In other words, you need to meet customer expectations about your offering.  Great software companies exceed those expectations.  Others let sales teams close the deal and throw it over the wall – leaving things like implementation or integration to another day.  Don’t be that guy.

One way great software companies set expectations is with a plan that the customer approves early in the relationship.  This doesn’t make sense for every provider, especially low price providers, and the plan doesn’t require every little detail.  But for high-touch, high-end solutions, customer users and leaders should play a role in crafting a plan that the customer approves.  Be open to this, even if it impacts CAC in the short-term.  It saves both you and your customer time and money in the long run, establishes trust among their users and your staff, and reduces the risk of buyer’s – or seller’s – remorse.  Critically, you’ll be more likely to start customers on a path to upsells, renewals, and referrals.  If your platform isn’t just “plug and play,” and your sales team already poured time and money into cultivating the deal, take a little extra time to set clear expectations and consider an early sign-off on the same.

Bridge Financing Documents

One of the sets of documents that we automated at AlphaTech is the bridge financing documents for an emerging company.  Attached is a sample of the documents: Convertible Note and Subscription Agreement

Instead of just using form documents as most law firms do, robust automation allows us to deliver common document sets for emerging companies in a more efficient manner.  So what else does “robust automation” yield?  It improves document accuracy, provides a valuable knowledgebase from which to draw, and enables us to deliver common document sets to our clients quickly.  It also frees up time of our lawyers to enable them to spend less time on basic contract drafting and more time on activities that afford our clients higher value. Continue reading →

Understanding the United Nations Convention on Contracts for the International Sale of Goods

Background on the CISG

The United Nations Convention on Contracts for the International Sale of Goods (“CISG”) is an international treaty that governs most sales of goods between a buyer and seller that reside in different countries, if those countries have adopted the CISG. It has been adopted in the US and more than 70 other countries. In fact, signatory countries account for more than two-thirds of all goods moving in international trade and encompass a majority of the world’s population. Significant trading partners that have adopted the treaty include Mexico, China, Japan, South Korea, Singapore, most of Western Europe (excluding Great Britain) and Canada.

In the United States, the sale of goods between businesses is generally governed by state-adopted versions of Article 2 of the Uniform Commercial Code (“UCC”). When contracting parties in the U.S. agree to terms, the UCC serves as a backdrop, filling certain gaps that the parties may have failed to address, establishing certain standards on warranties and disclaimers, etc. The CISG performs a similar role in an international transaction, but differs from the UCC in important ways. Set forth below is a brief summary of some of the key aspects of the CISG, as well as differences between the UCC and the CISG.

When the CISG Applies

As noted above, the CISG applies to the sale of goods between parties residing in different jurisdictions that have adopted the CISG. The CISG, however, does not apply to sales (1) of consumer goods; (2) by auction; (3) of securities or negotiable instruments; (4) of ships, vessels, or aircraft; or (5) electricity. The CISG is also not applicable to so-called “assembly contracts” where the party that orders goods to be manufactured supplies a substantial part of the materials necessary for such manufacture or production of the goods.

It is important to note that when applicable, the CISG is likely to apply unless expressly disclaimed in the contract. Case law suggests, for example, that if you are selling equipment to a Canadian buyer and your contract says something to the effect of, “the parties agree that the laws of Wisconsin will govern this transaction, except the conflict of law provisions therein,” the CISG will still likely trump Wisconsin law unless the contract goes on to state expressly that the CISG does not apply.

Differences between the CISG and the UCC

Should you care if the CISG applies? It depends. But you should know what you are agreeing to so you can make a reasonable choice.

CISG Applies to Oral Contracts

One significant difference between the CISG and the UCC is that the UCC limits the enforceability of oral contracts. The CISG states that a contract of sale need not be evidenced by writing and is not subject to any other requirement as to form. A contract may be proven by any means, including witnesses. Furthermore, in the absence of a specific clause to the contrary, the CISG generally permits oral amendments or modifications to contracts.

Battle of the Forms

The CISG and UCC also differ in their approaches to the “battle of the forms.” Under the UCC, a final form that is not intended specifically as a counteroffer will act as an acceptance, even though it contains different or additional terms to those contained in the prior form. The additional terms are considered as proposals for additions to the contract and, as between merchants, become part of the contract, unless (1) the offer expressly limits acceptance to the terms of the offer; (2) the terms materially alter the offer; or (3) notification of objection to the terms already has been given or is given within a reasonable time after notice has been received.

The CISG departs from the UCC approach and, instead, says a reply to an offer that purports to be an acceptance but contains material additions, limitations or other modifications is a rejection of the offer and constitutes a counteroffer. Thus, at least prior to performance, either party may be able to claim successfully that no enforceable contract exists under the CISG. After delivery and acceptance, a contract will undoubtedly be deemed to have existed. Although the terms of the contract may be subject to dispute, the CISG generally favors the last party to submit materially different terms.

Disclaimer of Warranties Less Formal Under the CISG

The UCC and the CISG have similar provisions for warranties, but the requirements to disclaim warranties differ. The CISG contains no provisions comparable to the disclaimer procedures that sellers may use under the UCC. For example, under the UCC, an effective disclaimer of the implied warranty of merchantability generally must mention “merchantability” and must be in conspicuous writing. Similarly, an effective disclaimer of an implied warranty of fitness must be in writing and conspicuous. The CISG is less formalistic and appears to permit disclaimers of warranties as long as the “parties have agreed” in writing or orally.

UCC Follows the “Perfect Tender” Rule

Under the UCC, a buyer is generally entitled to reject goods that fail in any respect to conform to the contract. This is known as the “perfect tender” rule. Under the rule, generally speaking, a buyer may in good faith reject goods and cancel the contract, even if a defect in tendered goods is not serious and the buyer would have received substantially the goods for which it bargained. The CISG departs from the perfect tender rule and makes rejection or cancellation more difficult. The buyer may void a contract only if the failure by the seller to deliver goods constitutes a fundamental breach. Under the UCC, the buyer has a reasonable opportunity to inspect the goods. However, under the CISG, the buyer must inspect the goods within as short a period as is practicable under the circumstances.

CISG Has a “Self-Help” Remedy

The CISG allows for many of the same damage remedies as those available under the UCC. Generally, a buyer may claim damages if the seller fails to perform. Under the CISG, damages typically equal the loss suffered as a consequence of the breach, including the loss of profit. These types of damages are similar to the direct, incidental, and consequential damages available under the UCC. However, the CISG includes a novel unilateral price reduction remedy: if the goods do not conform with the contract, the buyer may reduce the price. This self-help remedy is not available if the seller is able to cure non-conformity without causing unreasonable delay or inconvenience to the buyer.

Conclusion

Whether you will be helped or hurt by the CISG depends on the circumstance. In the ever-increasing world of global trade, however, buyers and sellers should be aware that it will likely apply unless expressly disclaimed and it will impact how their contract for the sale of goods is enforced. Detailed information about the CISG can be found at the website of the Institute of International Commercial Law at Pace University School of Law.