Understanding your legal contracts
In this week’s newsletter I’ll help you to understand some of the most common contractual terms in the agreements that you’ll be asking your customers to sign.
Being familiar with them can help you to reduce the time between “yes” and “done” - giving you and your manager peace of mind as the end of month or quarter draws ever closer.
Disclaimer: I am no lawyer, just a SaaS AE that’s sharing their experience of working with legal contracts. Speak to your own legal team before discussing this with your customers.
Types of agreements
The agreements that your company uses will be dependent on the products or services you are selling - but in my SaaS sales career there have typically been four main agreements.
Non-Disclosure Agreement - this is often signed during a buying process and allows one or both parties to share confidential information between each other. It can allow your customer to share details of their current systems or processes to help you configure the right proposal for them.
Master Services Agreement - this is the main agreement that will cover your relationship with the customer. It is sometimes called General Terms of Sales, or Terms and Conditions.
This agreement may also include a number of addendums such as a Data Processing Agreement.
Order Form - this document covers this specific requirement and will likely include the pricing and quantities that the customer is purchasing.
Statement of Work - this agreement describes any project work or implementation services that you will be providing to your customer. It might describe different roles and rates, and the scope and timeline for the project.
Non-Disclosure Agreement
Unilateral or mutual - most NDAs are quite short - one or two pages - and they allow the parties to share confidential information and confirm that it won’t be shared on further.
The most common discussion will be around whether the contract is unilateral (one party sharing with the other) or mutual (both parties sharing with each other).
Typically your company will only want to sign a mutual NDA, so if your customer says they want to share their version, make sure they are sending a mutual NDA up front - it will save you at least one cycle with the lawyers.
Master Services Agreement (MSA)
Often it is the MSA that is the document that contains most of the legal terms, so let’s look at that in more detail.
And let’s use Salesforce’s current online MSA as an example (they use the term Main Services Agreement instead of Master Services Agreement - but it is the same document.)
Salesforce’s Main Services Agreement
A good example of a SaaS MSA
Open it up on the button below so you can follow along.
Effective date: this is the date from when this MSA is enforceable. This can be important if your customer has signed multiple MSA’s over a period of time so you can determine what terms are applicable.
The effective date is often listed as a field on the signature block, but might also be the date of the last signature on this agreement. In this case it is the date the customer accepts the agreement.
Definitions: this section lays out key words from the agreement. This is important as some words are used in different ways in different vendor’s agreements.
Affiliates: this term defines who can use this agreement. If you imagine a large global business with hundreds of subsidiaries, this term confirms which of them could order using this MSA without having to agree their own MSA.
In this example it “means direct or indirect ownership of more than 50% of the voting interests”
User: this is an important definition in cloud services - depending on whether your company charges for named users, concurrent users, or even transactions. Make sure you and your customer both understand this definition before you get near pricing and negotiation.
Use of Services: in this section the MSA describes what the customer is able to do with the services provided, including any usage limits or responsibilities to not share or resell their licences.
Often this also includes not uploading any illegal or offensive content, or using the platform in any way that would break any laws.
Fees and payment: this section describes how and when customers will pay for the services, and what the penalties are if the company does not pay on time.
In 5.2 you can see that the standard payment terms are 30 days from the invoice date. This term is one of the most commonly negotiated by customers who want longer to pay.
Rights and Licences: This will vary depending on whether you are selling an on-premise solution or a cloud platform, but in the case of Salesforce, the customer has the rights to use the software, but the right, title and interest of the software itself always remains with Salesforce. This means the customer never owns the actual software, just the right to use it.
Confidentiality: There will always likely be a confidentiality agreement, as not all customers will have signed an NDA during the sales process.
This is a mutual confidentiality term as both Salesforce and the customer can be the disclosing party.
Warranties: these mean commitments or obligations, and in this case Salesforce commits (warrants) that during the term of the agreement the company will maintain the level of service, the documentation and the security levels. This gives the customer the confidence when buying a service that it will continue to function as it does when they sign the agreement.
Indemnification: these terms (which go from customer to Salesforce and Salesforce to customer) commit both parties to defending and protecting each other against any claims from third parties that arise from the use of the platform.
Limitation of Liability: these are commonly discussed terms and relate to limiting the value of a claim that can be made against Salesforce for any defaults or breaches relating to the customer’s use of the platform.
In this example Salesforce limits their liability to the amount that the customer pays them over a 12 month period. You will often hear customers talk about 1x or 2x and they are referring the the amount of liability as a multiple of what they pay per year.
Term and Termination: Often an MSA continues until all of the order forms under it have expired and that is the same in this case. This prevents a situation where an order form has no valid MSA above it.
Customers may ask for a termination for convenience or termination without cause clause - which essentially means if they change their mind they can cancel at any time. Most vendors will not accept this as it makes it impossible to recognise revenue if the customers could turn their services off at any moment.
Autorenewals: Many cloud vendors will have an autorenewal term which states that unless the customer cancels 30 days or more before the end of the agreement the contract will renew for a further twelve months. It may also include a defined price increase. This is often contested by customers.
General Provisions
Assignment: this term defines under what circumstances the customer (or the vendor) could assign the contract to another company.
A good example is if the customer was acquired by another company. In this case, Salesforce would not require written confirmation, and would even allow the new entity to cancel the agreement and be refunded any outstanding fees.
Local Laws: The Salesforce MSA then breaks down a number of specific additional terms for usage in different countries. Most commonly this will define a different governing law or location for any disputes and arbitration.
Some companies will actually provide different MSAs for different countries so do check with your own legal team.
You will also likely share order forms, Statements of Work, and Data Processing Agreements with your customer - but these are likely to be very specific to your company.
Accelerate your deals
My advice, take one of your friendly lawyers to lunch when you aren’t under pressure around a deal.
Ask them to walk you through your agreements and explain what each term means, what is most contentious, what is non-negotiable and why.
Next time you send over documents for a deal, you can give your customer a high level overview and head off delays before they occur:
“I’ve had other customers try to push on limitation of liability, but I’m afraid its a non-mover for us and here’s why…”
You can save yourself weeks on a contracting cycle just by being aware and showing your customer this isn’t your first rodeo.
So that’s it for this week. Good luck learning legal!
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