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hello this is heather meeker this is a presentation on how to negotiate a sas agreement i am a lawyer in private practice and a venture capitalist and i specialize in software licensing and software transactions this presentation is intended for anyone who wants to learn how to negotiate a sas agreement you might be a vendor or a customer or you might be a lawyer representing one of them this presentation goes through some of the most important points in negotiating a sas agreement and gives you some examples of the relevant provisions so let's get started here are some of the topics we're going to discuss today as you can see these topics range from core business topics to more arcane legal points but all of these are important when you are negotiating an agreement and by the way many of these particular topics overlap with each other so for instance fees and duration are inextricably bound up with each other and we'll see more about that in a few minutes the first and most important point about sas agreement is a little bit of a technical legal point but it's very important to your business too that is that software as a service agreements are not really licenses they're service agreements now many people confuse that and for that reason you'll see that a lot of software as a service form agreements are repurposed on-premises licenses i highly recommend not using this approach because it tends to distort the importance of certain points that are crucial to on-premises licenses but not sas agreements and on the contrary it also tends to de-emphasize points that are very important in sas and not important in on-premises licenses moreover it causes some unintended consequences let me give you an example when you're a vendor and you plan to give some on-premises software to a customer you need a license to do that what i mean by that is that if you didn't write the software all yourself and chances are that you didn't you would need a license from your upstream supplier to hand the customer a copy of the software and in many instances vendors don't have the right to do that particularly with proprietary software what they're often getting from their upstream suppliers is an end user license ingly they don't have the right to re-license that software to their customers so if you happen to draft your sas agreement as a license you've actually violated the rights in that upstream software and that can be important another point is that when people repurpose software licenses as for sas agreements they often tend to do things like granting perpetual licenses if you think about it perpetual licenses don't make any sense in sas you can't really have a perpetual service contract so you should avoid including licenses in sas contracts now there is one exception and that is that most sas implementations actually do use some client-side software and it's perfectly all right to grant licenses to those one of the implementations that you might not be thinking of is a mobile app a lot of sas implementations have mobile apps that go along with them and of course your customer may need a license to the mobile apps so while it's perfectly fine to grant licenses to whatever is going to be on premises or on customer devices you don't want your overarching sas agreement to be drafted as an on-premises license now you might be thinking to yourself if you're not a lawyer why is that important to me i didn't draft this agreement myself well it's important because if you're using the wrong kind of document it can have bad effects for your business later and so you then need to rethink what you're using that might mean going back and getting the right form of agreement or if your lawyer provided you with that agreement asking your lawyer to fix it so that it's really a services agreement here's an example of what a proper service obligation looks like and you'll see that it's not a license at all a license would say for instance supplier hereby grants to customer the right to etc etc but what this says is more correct it says that the vendor will make access to the platform available to the customer as required under the agreement and you can see here that there's also a provision for providing client-side software such as local web applications or mobile device apps in order to facilitate the use of the platform and that's where the license belongs so if you're a vendor you want to make sure that you're not granting rights you don't have if you're a customer you want to make sure that you have proper rights to your client-side software because for instance if there isn't a grant in this agreement you might be subject to say the default apple store ios terms and that may or may not work for you but it makes a lot more sense to have an overall enterprise license in your sas agreement for example the basic app store agreement wouldn't have anything about maintenance and support or warranties and you that's part of what you're bargaining for in a sas agreement so you need to make sure all that's covered that's why it's better to have the license for the client-side software in the sas agreement now let's talk about the next point which is users almost all software as a service is priced by the number of named users that are allowed to use the service and if you're a customer you want to make sure that you're getting the right usage rights in your agreement for example you might need the system to be used not only by your employees but by some contractors suppliers customers vendors other third parties and unless the agreement allows you to have users that broad you may not be getting all the rights you need now the sas agreement itself binds the customer and its employees because the employees are agents of the customer but if you want to allow use of the platform by third parties it's quite possible that the vendors will require those parties to actually click through some end user terms also when you're a customer as with any enterprise agreement you're going to want to make sure that you have broad enough rights for use by your affiliates or subsidiaries if that's what you plan to do here you see an example of the kind of provision that discusses the breadth of use allowed under the agreement you'll notice that one thing it says is that customer is responsible for all of the users adhering to the terms of the agreement that's a perfectly normal provision but for the customer there may be some question about how much control it actually exerts over third parties like customers and vendors and so forth this provision also contains some fairly normal terms for instance saying that users can't share accounts because that would be an end run around the price per user and that the customer can reassign users in the ordinary course when employees or other users come and go and by the way you'll see that this particular provision expressly allows for users that are not within the customer organization and i would say that that's pretty typical but it's not in all agreements it's a very important point for customers now let's talk about fees as with any commercial agreement the fee section is probably the most important part of the agreement it's important that it be clear and it's important that it be correct so most sas is price on an annual subscription basis per user of course there are other ways to price it as well but that's by far the most common and also because it is a service it usually includes maintenance and support in the sense that you would normally mean those things with respect to an on-premises license as you can see already there is a big difference between sas and an on-premises license an on-premises license usually has an upfront license fee and ongoing maintenance and support fees by the way in case you were wondering maintenance and support are different support means help with using the system maintenance means getting updates and for sas of course updates really aren't terribly meaningful because the system is usually being updated constantly often multiple times per day so you don't usually charge extra for maintenance and support now one important provision for customers and actually i think this works well for both sides is that if a customer needs more users the customer should be able to add users at the existing pricing without being in breach of the agreement or renegotiating it this happens a lot the needs might increase in fact if the deal is going well you expect the needs for users to increase and so i like to include in any sas agreement a provision that expressly allows the customer to buy more users when it needs to if you don't put that provision in then as soon as the customer exceeds the number of users involved they're actually in breach of the agreement and i don't think that really serves either party ingly there is sometimes a provision about negotiating discounts for additional users but not in all agreements in an on-premises software license there are usually audit provisions for example if you have an on-premises license and you allow 100 users the only way the vendor is going to know whether the customer is using 110 users is to actually go in and audit and so you'll see provisions allowing the vendor access to customer books and records or systems in order to do an audit but for sas that is not usually necessary so on the customer side if you see an audit provision in a sas agreement you have to ask yourself very carefully why is this necessary it may be in the agreement because it's a carryover from an on-premises software license also fees for sas agreements are generally done in the following way there will be an initial fee negotiated for say the first year and the customer usually wants a right to renew for subsequent years and the amount of renewals generally goes out to about three years and sometimes customers will push it to even more but of course that is only meaningful if the fees are locked in so what the parties will usually negotiate is that the fees are set for the first year and maybe there will be a limit on the ability to raise fees for additional years also customers may negotiate for a longer commitment at a lower price so the vendor may say if you commit to three years instead of one i'll give you a lower price per user so one of the most important provisions in a sas agreement is the duration of the initial period number of renewals who has the authority to say whether the agreement will be renewed or not and whether fees are locked in and if so for how long if you're a vendor one of the most important points is that you can't allow customers to renew forever you're going to get to a point somewhere where you can't offer the service anymore or you want to do an end of life on the service and if you have a perpetual obligation to allow a customer to renew that's going to play havoc with your business it may or may not be enforceable under the law but you don't want to engage in the legal battle to find out so make sure that there is a sunset on the term of the agreement but that's going to interact heavily with fees here is an example of a fee provision and there's nothing terribly special about it but of course you have to say when fees are due what payment terms the customer has and so forth you'll also see in this particular example the term i mentioned about adding additional users at then current fees by the way the customer may say that they need to be able to add users at their then current discount because mostly customers are not paying list price they're paying some discounted price and finally you see an example of a provision about fees for renewal periods here in this example a customer can renew at the vendor's then current list price which makes sense because that ought to be the highest price the vendor charges anyone much less it's good customers that already have an agreement in place and by the way from a legal point of view if the price for a renewal term is not set in the agreement it is almost effectively like not having a commitment for a renewal term because theoretically the vendor could raise the price enough so that it would be unattractive for the customer the next topic is data and this is the prime example of a topic that is hugely important in a sas agreement but not so important in an on-premises agreement in fact sas agreements usually focus a lot of the language in terms of the agreement on how data will be handled and the reason of course is that for sas the service provider or vendor has custody of the data of the customer in the sense that the data is residing on the vendor's servers now customers will always be rightfully concerned about the confidentiality and security of their data and it is typical in a sas agreement that the data provided by the customer in other words the data that the customer loads into the system will be used by the vendor only in order to provide the service customers don't expect service providers to be using their data for any other purpose but that's different from data that's actually generated by the service so almost all sas systems generate a lot of metadata about what the customer is doing and that information is usually very important for the service provider to be able to use in order to run the system properly and in order to improve it over time as it learns more about what customers are doing with the service ingly a proper sas agreement usually has different terms for customer data and for data that is generated by the service the customer data is subject to a very strict use limitation but the data generated by the service is usually usable by the service provider in order to provide and improve the service however to the extent that the service provider uses generated data it usually must be de-identified so it's not associated with the customer anymore now one of the biggest ticket issues in sas agreements is data security you've probably all read in the news about security breaches and how much liability they generate and what embarrassment they generate for service providers not to mention their customers so the data security provisions in sas agreements are usually key they are often very long and complicated and the vendor is required to sign up to data security protocols that will make the customer comfortable about having its data resident on the servers of the service provider i'm not going to go into a great deal of detail about what those security provisions look like they're usually extracted out to a separate exhibit very detailed and tend to be reviewed by the security officers or ctos of the service provider and the customer if the data being stored by the service is extremely sensitive for instance credit card information financial information health information there may be a significant regulatory overlay on how data security has to be conducted also because of privacy concerns it may be important that the location of data be limited to a certain geography sas agreements also usually have terms about retention of data so when the customer ends the software as a service agreement how long does it have to offload its data to a new provider in what way will the service provider assist with that process in what form it has to be available and so forth also in order to control data security issues some customers will demand that the service provider delete all of the data within a short window after the deal is over so you have two sides to this question how long does the service provider have to keep the data and how long can it keep the data most modern sas systems allow customers to freely offload data in a standard format at any time they like so if that is built into the system you may not need separate terms about it in the agreement we're going to talk about slas in a moment but security obligations may be part of the slas in the agreement in particular the vendor may have to live up to certain standards promulgated by standards bodies in order to continue to provide the service and perform under the agreement and finally on this topic this isn't on the slide but it is possible that the service provider will have to conduct regular security audits and provide the customer with a copy of the results of the audits so while i said that audits aren't usually necessary in order to determine fees under a sas agreement sometimes there are audits in order to make sure that the service provider is keeping up with its security obligations as you can see on this slide these are some very short examples treating the topics that we've just discussed regarding the vendor's right to use the data to provide the service regarding the vendor's security obligations and regarding the vendors right to use usage data in order to provide the service properly on this slide you can see some examples of terms about retention of data after the agreement is over and you'll see that this slide has an example of the ability of the customer to maintain a minimal subscription in order to facilitate data transfer that's not in every agreement most sas agreements allow this for free but some vendors require the customer to pay a modest amount in order to keep the data on the system for as long as they like and by the way there's usually an upper boundary on how long the customer can require the vendor to retain the data and that period would usually range from 30 days maybe up all the way to a year warranties is another topic where what you have in an on-premises license and a sas agreement tend to be quite different of course there is a broad range of warranties that are in agreements i'm only going to talk about the most crucial ones the first is the kind of warranty that most people think about when they think about warranties or guarantees and that is a performance warranty in a sas agreement the warranty is usually that the system will perform ing to its specifications and in a services agreement generally the remedy for breach of a warranty is that the customer gets a credit or the services are re-performed free of charge and all kind of complexity is possible in performance warranties but at the end of the day there are two remedies that are important to a customer the first is to get their money back and the second is to be able to terminate the agreement so some sas agreements do have warranties that allow a customer to get out of the deal if the service is not performing at all but that is much less common in sas agreements than in on-premises license agreements the other main kind of warranty is an intellectual property non-infringement warranty and these are common in both software software-as-a-service agreements and on-premises licenses but the risk associated with ip issues tends to be a little bit lower for customers in a sas deployment than it is for an on-premises license for exactly the same reason that this agreement is not a license the customer usually doesn't have access to copies of the software and so can only create a naturally limited amount of liability for itself ingly ip issues are generally dealt with as an indemnity instead of a warranty now this gets into some legal technicalities but at the end of the day you want to make sure as a customer that the supplier is responsible for any ip claims that might result from your use of the service as a vendor of course you want to avoid liability but in fact if you're running the service on your own it's going to be hard to avoid a lot of liability and so ingly in sas agreements the vendor tends to pick up most of the liability for ip infringement in on-premises licenses perhaps a little bit less so and here is a typical example of a performance warranty in a sas agreement i won't spend a lot of time on this because warranties are basic commercial provisions and you can certainly find out a lot about negotiating those elsewhere the point is that for a sas agreement this is mainly about the platform working ing to the specifications service levels are a very important topic in sas agreements and what they set will vary from service to service but the most common topics are uptime and latency and support response latency tends to be less important for systems with a heavy user interface components because human beings are slower to respond than machines latency tends to be an issue with hardcore processing like financial processing but most sas agreements have some kind of sla for uptime and response to support requests these days the amount of uptime has been creeping upward mainly because the online systems are so much more reliable than they used to be and the uptime that vendors are promising in slas is quickly approaching 100 percent in fact some vendors are already offering 100 uptime guarantees but when we say guarantees all we mean is that if the vendor does not meet the sla it gives the customer some kind of credit it doesn't mean that the agreement is breached and it's a very crucial distinction if you are a vendor your slas absolutely need to say that whatever credits you're offering the customer are a limited remedy and the sole remedy for breach of the sla requirements otherwise the customer may have an ability to terminate for breach and seek additional damages for failing to meet the slas by the way in legal terms this is sometimes referred to as a liquidated damages provision although sla credits can range greatly it is fairly typical that if there's a failure in a month there will be a credit of the fees for that month in a range of 10 to 50 percent of the fees due for that month also if there are repeated failures the customer may have the right to actually terminate the agreement and finally although slas are generally credits only and not refunds occasionally the agreement allows for a refund if the customer is at the end of the term and there are no further fees against which to take the credit here are some typical terms implementing sla remedies but of course the sla which describes the performance requirement for the vendor is usually at least a page or two long and has a great deal of detail such as how soon does the vendor have to respond to a support call and what is downtime which is usually excluded from the calculation of uptime requirements and so forth well that's it for this brief presentation on how to negotiate slas i hope you found it helpful on this slide you'll see some information about one of my books which is about negotiating technology licensing deals it's not specifically about sas agreements but you may find it a helpful resource and by the way i didn't do this presentation in order to sell the book on which i make very little money to begin with i just hope that it's a helpful resource to people in business by the way the form of sas agreement that i normally use with smaller customers is the one that i used in order to prepare this presentation's examples and if you would like a copy of that just send me an email and i will be happy to provide one to you thanks very much this is heather meeker signing off