At the end of the day, negotiations are all about leverage; leverage in turn is about what each party’s Best Alternative to a Negotiated Agreement (BATNA) is. For the customer, it’s usually relatively easy to find a vendor that’s at least comparable. For a vendor–especially a SaaS vendor, whose marginal cost of a new customer is trivial–the BATNA is much weaker.
That being said, there’s a few mistakes you can avoid, and a few tactics you can implement, to put a thumb on the scale; and if you pick the right battles, a concession can be quite meaningful.
Mistakes to Avoid When Negotiating a Contract
- Starting with an “off-market” template: If all the terms are crazy favorable to you, and you’re dealing with a somewhat sophisticated party, you are not only going to slow down your sales cycle, you’re going to spend *way* more on legal fees just to get it to a more neutral starting point.
- Using a generic SaaS agreement: While you don’t want your template to have terms that are unheard of, that doesn’t mean you should pull something off the shelf without looking at it. Getting inspiration from a competitor’s terms can be a great starting point, and often enough, you should be sure that’s the case for your particular startup, but have it fully reviewed at least once whenever your product or practices materially change.
- Uncapping limitation of liability: By agreeing to accept uncapped liability, you are not only risking a case where something that goes really wrong bankrupts your company, you are also risking a future investor–when diligencing your company–discovering you’ve made promises that are uncomfortable for them. Remember, you’re not the only stakeholder here.
- Offering broad indemnification provisions: Being too generous in the kinds of claims you promise your counterparty you’ll cover them for means you have a lot more breadth in the kinds of things that get you in trouble; keep yours as narrow as possible, especially if you don’t think you need the other party to indemnify you for lots of things.
- Intellectual Property Assignment: Be very careful with IP assignments. In the vast majority of cases within SaaS, all you need to offer is a “right to access and use” cloud services; for on premise software or bespoke deliverables, you might tweak this slightly, but make the starting point as narrow as possible–not just for you, but again, for your future investors.
- Not giving your lawyer targeted instructions: Assuming you’re familiar with what each provision in your template agreement does–as you should be– you should have a sense of where you want to direct your negotiation capital; if you just hand the doc over, it might come back heavily marked up, opening lots of battles that increase time and cost. Instead, choose your battles wisely; ask your lawyer to scan for issues generally and report back before marking anything up.
Things to Know When Negotiating a Contract
- Are you already on clickwrap? While these might be slightly less enforceable than signed Master Service Agreements, having your terms hosted online–where the consumer checks a box to agree to conspicuously displayed terms–means you will shave off the number of times your customer asks to negotiate in the first place.
- Can you start with your own template agreement? Using your own agreement means you are starting from a position you already know, so will likely take much less in transaction fees; and, if you’ve used a commonly accepted form as a starting point–like Common Paper or Bonterms–your counterparty will know that you’re in the ballpark of a reasonable starting place.
- What is your leverage? As we alluded to at the top of this article, you’re not going to get IBM to agree to limit your liability to 1x of fees paid. If it’s a really critical logo, you might need to prepare for larger concessions.
- What are you going to say when they inevitably ask for X, Y and Z? Some of these battles happen in almost every negotiation, so you can avoid wasting time and effort by working out a clear playbook for responding to these kinds of asks; for example, we always agree on the first ask to remove auto-renew. We always push back on changes to Limitation of Liability by offering a 2x multiplier, but our maximum position on this is to offer a supercap of 3x on confidentiality breaches; and so forth.
How to Negotiate a SaaS Contract
- Always having a reason for your number, or for your position: It’s much more persuasive. Instead of “meeting in the middle” between a $500,000 and $10,000,000 limitation of liability, tell your counterparty that there needs to be a reasonable correlation between upside and downside for you, so how about a 2x multiplier (example only; your own risk may significantly change this dynamic).
- Retain balance: Be willing to accommodate reasonable requests from your counterparty, but consider how that ask can then be compensated for by you. For example, if they want to increase the limitation of liability, then maybe indemnification should be narrowed to balance out this higher cap on risk; if they want to avoid pre-pay, then maybe they should cover your legal fees in the event of a suit. In other words, try to accommodate asks, but do it in a way that keeps your overall position comparable.
- Leverage your champions: Contract negotiations very often get stuck amid the ego of lawyers. When this happens, reach out to whoever it is on the business side of your counterparty; someone excited to use your product, your Account Executive, or whoever it may be, to see if they can talk their lawyer down. At the end of the day, lawyers are just agents for their companies, so sometimes, business leaders can help reign them in.
Wrapping Up
While much of the dynamics in SaaS tend to favor (1) customers over vendors and (2) larger parties over smaller ones, there are things you can do to mitigate the time, cost and headache of negotiating this kind of SaaS agreement. Consider especially the state of your template agreement, where you’re willing to make what kinds of changes, and what reasons you have–and that you can communicate to the business principal on the other side that wants to work with you.
