Essential Terms to Negotiate in Your SaaS Agreement

Essential Terms to Negotiate in Your SaaS Agreement

Software as a Service agreements govern how your business accesses and uses cloud-based software. Unlike traditional software licenses, a saas agreement creates an ongoing relationship between your company and the vendor. Getting the terms right from the start protects your operations, your data, and your budget.

Many businesses sign these contracts without fully understanding what they are committing to. This can lead to unexpected costs, service disruptions, and legal exposure. The following terms deserve careful attention during negotiations.

Service Level Commitments

Service level agreements, or SLAs, define the minimum performance standards the vendor must meet. These provisions specify uptime guarantees, response times for support requests, and remedies when the vendor fails to meet its commitments.

A typical saas agreement might promise 99.9% uptime, but you need to understand how that percentage is calculated. Does scheduled maintenance count against uptime? What about partial outages that affect only some users? The definition matters because it determines when you can claim credits or other remedies.

Beyond uptime, consider response and resolution times for different severity levels. A critical bug that prevents your team from working should trigger a faster response than a minor cosmetic issue. Make sure the SLA includes specific timeframes and escalation procedures.

The remedies for SLA breaches are equally important. Many vendors offer only service credits, which give you a discount on future bills but do not compensate you for lost revenue or productivity. In mission-critical applications, negotiate for more meaningful remedies or the right to terminate without penalty after repeated failures.

Data Ownership and Portability

Your data is one of your most valuable business assets. The saas agreement should clearly state that you own all data you upload or create within the platform. This seems obvious, but some agreements include ambiguous language about shared ownership or vendor rights to use your data.

Data portability provisions ensure you can retrieve your information if you switch vendors or if the relationship ends. Negotiate for the right to export data in standard, usable formats at any time, not just upon termination. Specify the format, timeframe, and any associated costs.

Address what happens to your data after the agreement terminates. The vendor should delete all your data within a specified period, typically 30 to 90 days. Get written confirmation of deletion if you handle sensitive information subject to privacy regulations.

Security and Compliance Obligations

Security breaches can devastate your business and expose you to regulatory penalties. Your saas agreement should detail the vendor's security measures, including encryption standards, access controls, and vulnerability management practices.

If your industry is regulated, confirm the vendor will maintain relevant certifications such as SOC 2, ISO 27001, or HIPAA compliance. The agreement should require the vendor to notify you promptly of any security incidents affecting your data, typically within 24 to 72 hours.

Consider including audit rights that allow you or a third party to verify the vendor's security practices. Many vendors resist this, but you can often negotiate for the right to review recent third-party audit reports instead.

Pricing and Payment Terms

SaaS pricing models vary widely. Some charge per user, others by usage volume, and many use hybrid models. Make sure you understand exactly what drives your costs and how they might increase over time.

Lock in pricing for a specific term whenever possible. Many vendors reserve the right to increase prices with minimal notice. Negotiate a cap on annual increases or require longer notice periods, such as 90 days, before any price changes take effect.

Watch for hidden fees. Implementation costs, training fees, premium support charges, and data storage overages can significantly increase your total cost. Get all potential fees documented in the agreement or in a detailed pricing schedule.

Term and Termination Rights

The initial term and renewal provisions determine how long you are committed to the vendor. Automatic renewal clauses can trap you in unfavorable agreements. Negotiate for reasonable notice periods before automatic renewal, typically 60 to 90 days, giving you time to evaluate alternatives.

Termination rights protect you if circumstances change. Beyond termination for cause when the vendor breaches the agreement, consider negotiating termination for convenience with adequate notice. This flexibility is valuable if your business needs change or if a better solution becomes available.

Pay attention to post-termination obligations. Some agreements require you to delete all copies of the software immediately, which can be impractical. Negotiate a reasonable wind-down period to transition to a new solution. Similar to a Termination Letter With Notice Period, your saas agreement should specify clear timelines for ending the relationship.

Limitation of Liability

Vendors typically limit their financial liability to a fraction of what you have paid them, often the fees paid in the preceding 12 months. This means if the software failure costs your business significant money, you cannot recover those losses.

While vendors resist increasing liability caps, you can often negotiate exceptions for certain types of damages. Breaches of confidentiality, data security failures, and intellectual property infringement should carry higher liability limits or no cap at all.

Understand what damages are excluded entirely. Most agreements exclude consequential damages, lost profits, and business interruption losses. For critical applications, try to narrow these exclusions or negotiate separate insurance coverage.

Intellectual Property Rights

The saas agreement should grant you a clear, non-exclusive license to use the software during the term. Confirm that this license includes all necessary rights for your intended use, including allowing your contractors or partners to access the system if needed.

Address ownership of customizations and integrations. If you pay for custom features or develop integrations, negotiate ownership rights or at least a perpetual license to use that work. Otherwise, you may lose access to critical functionality if you change vendors.

Protect any intellectual property you share with the vendor. The agreement should prohibit the vendor from using your confidential information, business processes, or proprietary data to benefit competitors or for purposes beyond providing the contracted services.

Support and Maintenance

Support terms define what help you can expect when issues arise. Basic email support may be inadequate for business-critical applications. Negotiate for phone support, dedicated account management, or priority support queues based on your needs.

Clarify what is included in the base price versus what costs extra. Some vendors charge separately for implementation assistance, training, or integration support. Get these services documented in the agreement or in a separate Software Consulting Agreement with clear deliverables.

Maintenance windows should be scheduled at times that minimize disruption to your operations. If you serve customers across time zones or operate 24/7, negotiate maintenance windows during your lowest-usage periods.

Vendor Changes and Subcontractors

Many SaaS vendors use subcontractors for hosting, support, or other functions. The agreement should require the vendor to ensure subcontractors meet the same security and confidentiality standards that bind the vendor.

If the vendor is acquired or undergoes significant structural changes, you want protection. Negotiate change-of-control provisions that give you the right to terminate if the vendor is sold to a competitor or if the acquisition materially affects service quality.

Some vendors reserve the right to assign the agreement to any third party. Limit this right to require your consent for assignments, except to corporate affiliates or in connection with a sale of the vendor's business.

Dispute Resolution

Disputes are costly and disruptive. Your saas agreement should include a clear process for resolving disagreements, starting with informal negotiation between executives before escalating to formal proceedings.

Many agreements require arbitration instead of litigation. Arbitration can be faster and more private, but it also limits your ability to appeal unfavorable decisions. Evaluate whether arbitration or litigation better serves your interests, and negotiate the forum accordingly.

Pay attention to governing law and venue provisions. Vendors often specify their home jurisdiction, which may be inconvenient and expensive for you. Try to negotiate neutral ground or your own jurisdiction, especially if you are a significant customer.

Negotiating a saas agreement requires balancing your business needs against the vendor's standard terms. Vendors have more flexibility than many buyers realize, especially for larger deals or longer commitments. Focus your negotiation efforts on the terms that matter most to your specific situation, and document everything clearly to avoid disputes later. Taking time to negotiate properly at the outset saves significant headaches and costs down the road.

What service level agreement penalties should you include in SaaS contracts?

Service level agreement penalties in your SaaS agreement should include service credits as the primary remedy when uptime commitments are missed. Typically, providers offer credits ranging from 10% to 100% of monthly fees, depending on downtime severity. Include clear measurement methodologies, such as how uptime is calculated and what constitutes an outage. Consider escalating penalties for repeated failures, and negotiate caps that balance provider risk with meaningful customer protection. Add termination rights if service levels fall below minimum thresholds for consecutive periods. Ensure penalties cover response time failures, not just availability issues. Finally, require transparent reporting so you can track performance and claim credits promptly. Well-structured penalties incentivize provider accountability while protecting your business operations.

How do you protect your business with audit rights in SaaS agreements?

Audit rights allow you to verify that your SaaS provider is meeting their obligations, including accurate billing, data security compliance, and service level commitments. When negotiating your SaaS agreement, include clear audit provisions that specify the scope, frequency, and notice period for audits. Ensure you have the right to use independent third parties to conduct reviews and that the provider must cooperate by providing access to relevant records and systems. Define who bears audit costs, typically the customer unless significant discrepancies are found. Strong audit rights give you leverage to address billing errors, confirm compliance with regulatory requirements, and validate that the vendor is protecting your data appropriately. These provisions are especially critical for industries with strict compliance obligations or when handling sensitive customer information.

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