Scalable SaaS Best Practices: The Legal Agreements Discipline

SaaS legal documents MSASaaS is a beautiful business model. Most modern companies owe their efficiency to cost savings that services provided under SaaS model bring to the table. But sometimes week or day does not pass without someone sending me back marked up MSA (master services agreement). And every time my answer is the same: “I am sorry, but all our customers are under same MSA, and we don’t allow edits”.

Look, I would love to do business like my father did – handshake agreements. But that isn’t something possible in a globalized economy. So here is why being very disciplined about using same legal agreements makes sense:

  • Few SaaS companies have in-house counsels, good law firms charge several hundred dollars per hour for their attorneys, and even if you have worked with thousands of legal docs in your career; there is no way you can keep up with changes in the laws of each jurisdiction. Costs of customizing AND compliance with custom terms not only are hard to amortize but if you did, too often you would need to increase the price of your offering many times that market would perceive competitive.
  • Which leads me to the next point: your sales team will complain about longer sales cycle and that they will lose deals. In my personal experience running operations in 4 SaaS companies, that hasn’t been the case. Not only haven’t I seen any change in sales cycles in general, but with larger customers it often speeds the process up, because you aren’t going through multiple rounds of doc review and edits. Have there been occasions where contract size shrunk from projected? Definitely, but I have enough fingers on my hand to count how many time that happened in my 11 years in SaaS. Even then, the lost revenue would have been eaten up anyway by much higher operating costs.
  • “But we just want something minor. We need a change in law/jurisdiction/venue”. That is a very common request and counsel after counsel has “beaten” into me how “little” things like that will make portions of your contracts unenforceable. Your staff is trained in specific operational practices, your product is architected to follow certain regulations, your insurance policies were underwritten based on the risk of contracts you use, and you already shelled out boatload of cash to get your legal docs done right – be disciplined, do not undermine your business.

But if you must, if you absolutely can’t say no to that humongous customer (which is dangerous, since those requests don’t slow down, and now they have huge leverage on you), amortize all those costs. If you have history of certain type of customers demanding you accept their MSA or marked up version of yours, you should:

  • #1 quote the SaaS fee 3X of what you think you need to cover your costs. Because you likely will barely break even. Large customers require large overhead. Be fair to your business and price it right.
  • Procure separate cyber liability policy just to cover the contract.
  • Fight tooth and nail to make sure your monetary liability clauses stay within exactly what was paid by the customer in the last one year and nothing more. Push for each party to be responsible for own legal fees.
  • And while you are doing the negotiations, please make sure stakeholders on your team, who will need to make sure compliance is there with the new terms, actually understand what you are getting them into and how it will affect them.
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