SaaS is a beautiful business model. Over the last fifteen years, I got to build four companies in the B2B SaaS space. I love the efficiency of the model! Frankly, building companies would be so much more expensive without the cost efficiencies SaaS products bring.
And yet every other customer, big or small, would like either their contract used or mark the living daylights out of your Master Services Agreement and every other document attached to it. I would love to breeze through legal with no friction to add to the holy MRR, but there is a reason why only the top MRR contributors got to redline our MSA. Why such strict discipline?
- Cost of the customer intake legal can not be shuffled into G&A. It is part of the fully-loaded Customer Acquisition Cost (CAC) – a crucial KPI to measure if you would like to wean off having to raise yet another venture round or take on more debt. A couple of hours of legal will often wipe away any chance of the Lifetime Value of the customer being higher than CAC. And that does not include the cost of compliance or potential damages down the road.
- While there is always pushback from sales teams and claims of longer sales cycles or lost deals, I passionately challenge those assumptions, given the experience with thousands of customers through those 4 SaaS companies. On the contrary, reducing the number of customers going through multiple rounds of red-lines speeds things up.
- There are two types of customers that churn terribly and leave you to eat the CAC – the heavily discounted customer and the one with procurement/legal acting like they are buying your company, and this is an M&A transaction. Let your competitor enjoy this customer.
- The scalability of SaaS hinges on the repeatability and efficiency of every element of how the company operates. Product architecture, operational processes, regulatory compliance, insurance policies, and other key pieces determined your legal documents. Everything is tied together. Before you know it, you just committed to a custom product development engagement, not a SaaS subscription.
The reality is, those real top 5% of customers have the cash you need. And since there is enough margin to have CAC<LTV, you will accommodate. While there are a lot of variables and options, here are some top dos and don’ts I encountered:
- DO NOT use “their paper” (aka their agreements). SaaS is not a custom software development project made solely for a specific customer.
- DO stick to MA, DE, CA, NY as the choice of law governing the agreements. International customers should be signing US agreements* unless you have a physical location in your specific customer’s country.
- DO NOT waiver on liability clauses. SaaS pricing is based on equal liability risk within the specific customer cohort and product served. If push comes to shove, see if the insurance provider will sell you coverage for the risk in that sole customer agreement and amortize that cost accordingly either via setup/professional services fee or an increase in an annual SaaS fee.
- DO work with the payment terms, but attach a cost to it. In general, unless it is a government entity, Net90 is the max. You are not a bank, so financing your customer’s SaaS fee is not within the SaaS model’s efficiencies.
- DO NOT allow any modifications to your IP clauses. Ever. Failure to stand firm protecting the core of your product’s value will come haunting you at the next financing round or M&A.
In closing, discipline is very effective in every functional area of your business. Good legal “hygiene” will help you get to and stay profitable.
*GDPR agreements are an exception.