Succes in SaaS

The legal side of SaaS

Reading time 5 min

By Maurits Dijkgraaf

There's a lot to consider when setting up and extending a SaaS application. As an entrepreneur, you have to take dozens of aspects into account. Your idea should be fully polished, technology should perfectly support it, and you need to gather the right people to market your application. Besides the application itself, you should also consider the business aspect of it: How to finance development? How to grow fast, but not too fast? And what legal aspects are important?

In Success in SaaS, I, Maurits Dijkgraaf, SaaS specialist at PAQT, will talk to various experts to learn more about the underlying challenges of developing SaaS. For this edition, I sat down with Maurits Geelkerken to discuss the legal side of entrepreneurship in the world of SaaS. As a lawyer and SaaS entrepreneur, he’s highly familiar with the pitfalls and opportunities of contracts, conditions, and obligations. 

The contracts PAQT concludes with SaaS entrepreneurs always contain clear agreements on support, intellectual property, and liability. We like to have these things in clear writing beforehand, so everyone knows where they stand. But is it necessary to record these (and other) things in writing? I asked Maurits Geelkerken that question. “As a lawyer, I regularly check contracts of entrepreneurs,” he says. “The things you mention are points of interest my customers always ask questions about and that I always pay attention to as well. They’re not all necessary, but it’s wise to record each of them, both as a supplier and as a SaaS customer.” 

PAQT Menno Ringnalda

Who is liable?

“One of the main points I always pay attention to is liability,” Maurits continues. “As a SaaS customer, you outsource part of your business  process to a supplier. The software’s level of importance to your company strongly depends on the type of software. If an invoicing module crashes, it’s less disruptive than if your entire production process comes to a halt because a critical connection is down.” 

“Whether you, the SaaS supplier, are liable for lost revenues depends on the agreements you have made with your customer. Examples include the agreed uptime, as well as the way in which a customer should give notice of default to you, or a reasonable time frame that allows you to solve problems. These types of agreements should be laid down in your contracts — or, on a larger scale, in your general terms and conditions. Always keep in mind that while you want to keep your liability as a software supplier as limited as possible, you also want your customers to rest assured that they can fall back on you if there are any issues. 

“The agreements you’ve made with your developer are another aspect you should consider as a supplier. If you promise 98% uptime to your customers, you should make sure your developer can guarantee that same uptime. These types of agreements always flow through the entire chain. If, as a supplier, you haven’t made clear agreements with your developer, you really can’t promise anything to your customers, either.” 

Ownership belongs to those who build — not to those who buy

“Another example of an element whose effect is felt throughout the chain is ownership. If you don’t conclude an agreement on intellectual property, the creator owns the software. In this case, the software developer’s employees are the creator. However, developers often stipulate in their employment contracts that employees transfer ownership to the employer. It’s important that as a supplier, you also conclude such an agreement with your developer — otherwise, they will legally own your SaaS solution. So, you should stipulate in contracts that the ownership is transferred to you, the client. Additionally, it’s important to also include a warranty statement  in which the developer declares that they own the property and have the right to transfer it to you. In the unlikely event that they haven’t made proper agreements with their staff, they will be liable because of that warranty statement.” 

No SLA? No obligations!

“SLAs are often the poor relation in SaaS contracts,” says Maurits. “Sometimes entrepreneurs call me when their system is down and their supplier does not immediately provide a solution. They ask me what they can do about it. When I ask explanatory questions, it often turns out that they haven’t concluded any agreements on support and continuity. If that’s the case, you’re at the mercy of your supplier’s goodwill. Do they want to fix the issue for you in a decent, fast way, or are you simply told to get in the back of the line? Without an SLA, you really don’t have a leg to stand on. 

“Important elements to include in an SLA are response times, uptime guarantees, and penalty clauses in case agreements are not met. Incidentally, these penalties are almost never collected, but they tend to offer security and serve as an incentive. When it comes to response times, it’s also wise to consider time zones. For example, if you work with partners in the U.S., you’ll want to make sure you won’t have to wait for six to nine hours to get support. 

“SLAs are a good example of an agreement that benefits both customers and suppliers. Suppliers who conclude clear agreements with their customers not only provide great service, but also manage their customers’ expectations. If problems occur and you haven’t concluded an SLA with your customers, they will often expect you to help them right away whenever they call you. If, for example, you’ve agreed to provide a solution within two hours, they will know where they stand, and they’ll usually accept it. What I’m trying to say is, if you conclude clear agreements with your customers, you’ll also create more peace for yourself — even if it means you have to warrant certain things.” 

Data processing agreement

Since the introduction of the General Data Protection Regulation, also known as the GDPR law, a data processing agreement should be included as a standard part of virtually every contract. “In software, you’re nearly always dealing with personal data — whether it belongs to users, employees, or customers,” says Maurits. “Nevertheless, people often treat it too lightly. If, however, you receive a request to delete data, or the Dutch Data Protection Authority asks you a question, you should be able to demonstrate that you’ve organized everything correctly. You can stipulate such matters in a data processing agreement. That way, you can rest assured that all parties will cooperate when necessary. Sometimes penalty clauses are included, which apply if the agreements are not met. But usually the parties involved simply agree on an obligation to use one’s best efforts.” 

Custom contracts in SaaS

Many agreements can be recorded in standard contracts or general terms and conditions — especially if your software is used by hundreds or thousands of customers. But there are also SaaS entrepreneurs who focus on a specific niche with their solution. In that case, what types of custom agreements can you expect as a supplier? “It strongly depends on the industry you operate in,” says Maurits. “SaaS is very beneficial to many parties, as it saves development costs and maintenance. But in specific niches, suppliers often have to respond to custom demands. An example includes a separate module that seamlessly integrates with one of your customers’ company-specific processes. You should conclude separate, solid agreements on such a module, regardless of the basic agreements regarding your basic solution. For example, who owns the intellectual property of that part of your solution? Some customers will demand exclusivity to ensure you don’t use the customization for a competitor. Others will be okay with that, provided you inform them in advance or give them a discount if you can use the customization more often.” 

 

Customer-friendly and clear

“Legal matters are not just a must,” Maurits concludes. “If you adopt a smart approach, they also offer a sales opportunity. If you ensure clarity in contracts, you’ll provide security to a customer. By showing what you’re offering in writing, you’ll differentiate yourself from a company that shouts empty promises from the rooftops without putting their words into action. Clarity and security may be the decisive factor for customers. At the same time, agreements provide security to you, too. Of course, what’s most important is to fulfill agreements. You can do so by ensuring the agreements you’ve concluded with customers are similar to the agreements you’ve concluded with suppliers. If all agreements throughout the chain are correct, nothing stands in the way of you being successful in SaaS from a legal point of view.” 

About the expert

Together with his brother, Maurits Geelkerken runs a law firm in Amsterdam. He’s also a SaaS entrepreneur. His love for software was born around the age of 20 when he was in law school and interned as a lawyer at a software company. Ironically, he had barely touched a computer until then — he preferred to be creative. But once he saw the benefits of software, creativity and entrepreneurship quickly converged. In 2016, for example, he devised an application for credit control called Vrendly, which he successfully sold to Exact after three years. After that, he started the Rechtsbijstandportaal (legal aid portal), among other things, and he became a co-owner of the work atmosphere & welfare app GetInsight. 

PAQT Maurits

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