What Makes an Ideal SaaS Contract?

The old model of licensing on-premises software is nearly extinct. Now, many companies license software as a service (SaaS). Because your company is now hosting your clients’ data, unlike installed software, there are a few key differences in a SaaS contract. Once you’ve made the decision to utilize a SaaS model, you will need to draft a contract to protect your intellectual property, and allocate the rights and obligations between parties.

So, what makes an ideal SasS Contract?

Consider the size of your target clients. A small business is likely to be willing to enter into an online SaaS contract without negotiation. A larger client will be more likely to require a traditional contract and have specific requirements such as uptime requirements and error correction efforts. Some clients may require the SaaS offering be provided from servers located in the United States.

License scope, access rights and users. This part of the contract outlines the number of users permitted, amount of data stored, bandwidth and processing limits along with the additional costs for exceeding that number.

Provisions on data ownership. This clarifies who owns data uploaded and downloaded to and from the service. The ownership and use restrictions of analytical data generated by the service should also be delineated.

Clarification on data security. This outlines each party’s responsibilities regarding encryption, backup, and security. The clause is vital for SaaS companies that work with clients’ sensitive information.

Limits on liability. While generally the same as a contract for on-premises software, expect negotiation around security breaches and loss of data.

Performance standards. The contract should describe the expected “uptime” service levels and error resolution efforts as well as penalties for not meeting the required levels. These levels can have different tiers and associated pricing.

Term, termination, and renewal clauses. This sets forth a subscription period, terms for canceling, changing, or renewing the subscription, and (if applicable), terms for early cancellation.

These points outline many of specific terms that should be included in an SaaS contract, but are by no means an exhaustive description. If you plan on proceeding with a SaaS contract, it is advisable to work with a business planning attorney who can help you draft and review the appropriate contract for your needs.


Picture of Michael Kimball, Esq.

Michael Kimball, Esq.

Mike Kimball offers practical, timely, and economical legal solutions that move projects along and allow you to focus more on your core business objectives. He has years of experience partnering with companies ranging from Silicon Valley startups to firms in aerospace, biotech, construction, and many more. Mike’s in-house experience includes Yahoo!, Krux Digital (acquired by Salesforce), and Commerce One. He has worked on transactions with Eurostar, Red Bull, Major League Baseball, NASDAQ, Goldman Sachs, Liveramp, Amazon, and NASCAR.