Developing Your SaaS Agreement

An increasing number of traditional software and hardware companies are accepting the idea that software as a service (SaaS) is here to stay for some time. In September, Oracle announced that it was significantly increasing its on-line, subscription-based software tools available for middle market companies. and Cisco announced last week a partnership that brings together’s online customer service software with Cisco’s IP telephony. The service, called “Customer Interaction Cloud,” is designed to provide a complete, cloud-based customer service offering for small to medium sized businesses. Even Dell, with its recent acquisition of Perot Systems, has signaled an interest in expanding its presence in the SaaS space. From a customer’s standpoint, SaaS generally offers quick deployment, low upfront cost, easy management and scalability.

Legal Difference Between Traditional Software Licenses and SaaS Agreements

Before delving into the SaaS market, it is important for traditional software companies (whether that be off-the-shelf product companies or customized software developers) to understand the differences between a typical software license or software development agreement and a SaaS agreement. At a fundamental level, what is being conveyed in a software license or software development agreement is different than a SaaS agreement. A software license or development agreement typically grants either a limited or exclusive right to use the software. In some cases, they include an assignment or transfer of the actual code from the developer to the purchaser of the software. A SaaS agreement, on the other hand, typically grants only a limited right to use a “service,” with no rights to the underlying software.

Key elements of a SaaS Agreement

With the legal difference between the two business models in mind, as well as the practical differences (web based offering versus an on-site thick client or server-based offering), below are some highlights of the provisions of a typical SaaS agreement:

Subscription for a Service.

Typically, SaaS agreements provide for a subscription to a service for a specified period of time. Many states give this structure more favorable sales tax treatment over traditional shrink-wrap software license agreements.

Performance and Up-Time Guaranties.

Most SaaS agreements address at least a base level of performance and functionality requirements of the service. For more sophisticated SaaS offerings, it is common to see Service Level Agreements (SLAs). The SLAs typically address issues like site and application downtime limits, support response times, and system response times.

Privacy and Security.

SaaS agreements usually address privacy and security issues as the SaaS provider typically holds its customers’ sensitive data. SaaS vendors generally provide some base level of assurances of privacy and security, even in low price SaaS offerings. For the large and more sophisticated offerings or where there are unique confidentiality concerns, the privacy and security provisions in the SaaS agreement can be very detailed. For example, many public companies require that a SaaS vendor’s systems and offerings be compliant with Statement on Auditing Standards No. 70 (SAS 70), which is a rigorous audit standard for controls on accuracy and security.

Data Backups and Data Porting.

In most sophisticated SaaS offerings, the SaaS agreement should address data backup, redundancy, and disaster recovery. Similarly, many customers of sophisticated SaaS offerings will want assurances on the ability to move the customer’s data either to an internal system or another vendor.

Renewals, Termination, Fees and Payment Terms.

Having a continuing relationship requires that the SaaS agreement address items like automatic renewals, termination (who has the ability to terminate upon how much notice), fees (when and how often charged and for what and the ability to change), and payment terms.

Obviously, there are other provisions as well, such as warranty disclaimers, indemnification, limitation on liabilities, export laws, etc. How much these terms vary from traditional software licenses or development agreements are dependent upon the particular SaaS offerings.

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