Definition of a SaaS Reseller Agreement
A Software as a Service ("SaaS") reseller agreement is a legal document that formalizes the partnership between a software company (the "Provider") and a reselling entity (the "Reseller"). The basic structure of the agreement includes an identification of the parties, the product or service to be resold, and the payment structure. The Reseller pays a fee to the Provider, often with the Provider retaining a percentage of the profit.
Reseller agreements are targeted at two specific audiences and markets: on-premise systems and cloud-based infrastructure. On-premise systems are traditional installations , in which the Provider sells software locally to the end-user. Cloud-based infrastructure typically involves a subscription model, in which end-users pay for a one-year term (renewable) and access providers hosted applications from their own devices, typically over the World Wide Web. The Provider hosting the software and applications on its own servers alleviates end-users from purchasing computing infrastructure and installing it on their local operating systems. SaaS resellers typically focus on cloud-based infrastructure.
Essentials of a SaaS Reseller Agreement
Just as every online business is different, so are the formalities and functions of every SaaS reseller agreement. However, a typical SaaS reseller agreement usually includes most if not all of the following essential elements:
Scope of Services. It is important that the seller of SaaS set forth a detailed description of all the services being provided to the reseller. These may include use of software, software hosting, software support, training, assistance and consulting. Essential details such as location of system (on premise, off premise, or in the cloud), bandwidth availability, speed, data storage, and uptime should all be discussed at length to avoid any ambiguities.
Pricing and Payment Terms. The SaaS reseller agreement typically discusses the price for the SaaS, the price the reseller will charge its customers for the service, what happens if the reseller taxes its customers, the reseller’s minimum viable price point, how often payments will occur and what happens if payment is delinquent (including interest) upon late payment. A description of any license fees, implementation fees, renewal fees, upgrade fees, and setup fees should also be discussed in detail in the agreement.
Termination. Depending on the type of service being provided to the reseller, the agreement usually describes the duration of the reseller’s access to the services, the ability to terminate for cause, notice required, the reseller’s return of all materials upon termination, the seller’s right to assign the contract, whether or not the reseller can obtain its customer list upon termination and more.
Intellectual Property Rights. Attention needs to be paid to the specifics of how the software can be used. Caution should be exercised for language that might construe a transfer of rights or ownership of any portions of the software. For example, general definitions should be included for each party’s respective ownership of information, and covered methodologies, practices, techniques, processes, business methods, algorithms, programming, know-how and technology. The seller should also retain the right to seek injunctive relief against its resellers for any anticipated infringement upon the seller’s intellectual property or breach or threatened breach of the seller’s intellectual property rights.
Licensing Requirements. Depending on the industry, the seller may need to be licensed in order to be able to operate in that industry. For example, in order to provide e-prescription software, the seller may need to be licensed as a pharmacy benefit manager. Should authorization or licensing be required, the seller may want to require that the reseller be licensed also and the seller should require that the reseller only offer its services in compliance with applicable laws.
Advantages of SaaS Reseller Agreements
SaaS reseller agreements allow for the expansion of a software provider’s market and for a reseller to develop additional revenue streams. An agreement for a reseller of your software increases the number of sales representatives selling your products and identifying customers for your products. It can also provide for an increase in the number of software licenses used by each of your reseller’s customers. Resellers can target new markets and leverage their distribution channels to build your business. Allowing a reseller to use the provider’s trademarks increases the software provider’s visibility and goodwill among the reseller’s clientele. Software providers increase revenues immediately through upfront payments and potentially increase revenues long term through the participation of the reseller in maintenance, support and subscription fees.
SaaS reseller agreements also allow for a reseller to generate additional revenue and increase sales of services rather than the sale of the software. A reseller may develop relationships with a customer and become an "expert" on the provider’s software. The reseller can then offer implementation services, training, ongoing consulting and additional services to the provider’s software customer.
Careful drafting protects the provider’s business interests by identifying appropriate limitations on the reseller’s compensation as well as the types of customers for which the reseller can provide the provider’s software.
Common Issues in SaaS Reseller Agreements
SaaS reseller agreements are not without their challenges, despite the numerous benefits that they provide to both the technology provider and its distributors. A handful of common issues plague most SaaS reseller contract negotiations and can significantly impact the transaction if not addressed appropriately.
One of the more common challenges in a SaaS reseller agreement is compliance with local laws. It is not uncommon for a distributor to have its own intellectual property rights that overlap with the SaaS provider’s systems and/or software. For example, if the SaaS provider’s service or software is being used to store, create or otherwise process personal information about local customers, such software may need to be locally hosted and/or managed depending on the jurisdiction. If the distributor simultaneously provides other services unrelated to the SaaS reseller agreement, such as hosting, the agreement may need to address data processing and migration obligations. This is because personal information and related records are often stored on shared databases, making it difficult to separate information under the SaaS reseller agreement from the customer’s other systems.
Another challenge in a typical SaaS reseller agreement revolves around customer support obligations. Depending on the expertise of the reseller and level of support required by the customers, support obligations can be complex and a further impediment to a transaction. If the SaaS reseller has a minority interest in the transaction (i.e., i.e. less than 50%), those support obligations may be handled by a third party, thereby avoiding the distributor’s own resource allocation or financial challenges. However, doing so can reduce the distributor’s value-add and may, in the end, undermine the SaaS reseller relationship.
Finally, market demand for the SaaS itself may also present a challenge for a SaaS reseller agreement. For example, if the distributor or technology provider must invest in resources to get access to the desired customer base, there may be a short-term negative impact on margins. While this may be acceptable to the distributor, if the technology provider will not agree to the margin reduction, it could prove fatal to the transaction. Typically, the parties will want to include terms that address the technology provider’s obligations to assist the distributor with increasing its sales performance, and the duration of any such arrangement.
Tips for Creating a SaaS Reseller Agreement
When entering into a reseller relationship with a SaaS provider, it is important to not only have the necessary protections in place with the end-user licenses, but also to have the appropriate contractual provisions under the reseller agreement itself. If it has not done so already, the reseller should work to obtain concessions from the SaaS provider that reflect the particular rights and responsibilities of the reseller.
Pricing Terms: It is important to negotiate pricing terms that will enable the reseller to achieve acceptable margins, and then to structure the program accordingly. For example, the pricing for additional licenses could be structured to vary depending on a minimum base of licenses purchased each month. The parties could also structure the pricing based on benchmarks such as current license counts or expected growth in the upcoming months.
Sales and Marketing Support: The reseller agreement should identify the types of sales and marketing support that the SaaS provider will provide. The agreement should also identify the types of sales and marketing support that the SaaS provider expects from the reseller . The parties could also agree to a joint go-to-market strategy that includes the overall sales approach as well as the needs and wants of certain customer verticals.
Service Level Agreements: The reseller may want to contract for service level agreements from the SaaS provider to support the reseller’s obligations to its own end-users regarding response times and uptime.
Termination Rights and Rights of First Refusal: The reseller agreement should identify the types of performance thresholds that the reseller must maintain to retain its reseller rights. The agreement should also identify the process that the parties must follow in terminating the agreement, and any rights of first refusal that the reseller may have in connection with a change of control or acquisition.
Recurring Fees: The parties should consider a fixed percentage of recurring fees that will be payable to the reseller, in addition to the one-time fees payable at the time of signing and at rollout. In some programs, the fixed percentage becomes a smaller percentage as the number of licenses increases over time.
Key Legal Issues in SaaS Reseller Agreements
The legal considerations in a SaaS Reseller Agreement are of a number of critical importance. The Data Protection legislation is of huge importance, especially since the implementation of the GDPR and failure to comply with it can get really expensive. Other areas of huge importance include:
· Jurisdiction clauses / law clauses (especially if there are cross-border elements to the sale); and
· Dispute resolution mechanisms / choice of courts clauses – again, especially cross-border
UK law governs the contractual relationship but must be interpreted by reference to the Data Protection legislation in force from time to time, both in the UK and in any country where Personal Data is processed as part of the SaaS.
Emerging Trends in SaaS Reseller Agreements
In the future, SaaS reseller agreements may increasingly reflect the realities of Internet-of-Things (IoT) technology development, as well as big-data and artificial intelligence (AI) technologies. For example, it could become common for AI models that are developed by a technology developer to be integrated into its partner reseller’s products, which the reseller then sells or licenses to end users. There also may be greater coupling of physical and digital goods, which might result in revenue share arrangements. If a resale involves chargebacks and other payments between the technology developer and end user, the terms relating to such payments would be reflected in a revenue-share agreement. It may not be possible to identify the end user of a technology that is integrated into a customer’s product until the ultimate device is deployed and/or sold, or even longer. As a result, the revenue-share agreement may need to use another variable, such as a number of devices in a particular product sold, or number of software downloads, which would be used to calculate what the end user would have paid and then ratably allocate the payment to the technology developer over the period of its agreement with the reseller. However, in a cross-border reseller relationship , the technology developer may need to consider the cross-border implications of sales involving IoT technologies, including what taxes apply on domestic and international levels and liability issues regarding customer-related claims (e.g., product liability). The evolution of privacy and data protection laws could alter SaaS reseller agreement practices. More data and personal information is collected and processed, businesses may be more likely to engage with customers through their mobile devices and through IoT technologies, and the parties might include more detailed terms in their reseller agreements. In addition, common rescission of consumer contracts may impact the SaaS reseller agreement and the parties’ obligations under them. Changes to certain contracts impacting the SaaS reseller agreement also might occur. For example, current and potential future changes to international trade disciplines might affect the parties’ ability to negotiate an agreement with respect to where or how the parties’ customer information is used or stored. Further, uncertain or more dynamic circumstances in and between countries may result in increasing levels of guerrilla warfare-type legal activity among companies competing in the same market, which could alter the parties’ ability to control IP claims impacting the reseller agreement.