Aug 18, 2022
Assessing a Master Services Agreement for a SaaS Business as a Non-Lawyer
I’ve seen hundreds of MSAs and there is a pattern of ‘suspect behavior’ that if you are looking out for, can head off at the pass.
I want to emphasise from the start that I’m not a lawyer. Have no training in law and therefore not qualified to give legal advice. However, I am a seasoned entrepreneur who has seen his fair share of MSAs or red-lined versions of our own MSA to know what to look for. If you have these simple flags to watch for, you can make the call as to whether to argue them yourself, or whether to pull your lawyers in to help (but when in doubt, you should probably speak to someone who is qualified!).
The problem with SaaS and client-created MSAs.
As a SaaS company, especially a startup one, you can often feel like you’re being bullied by your enterprise customers who insist that you sign their MSA rather than them signing yours. If you can, you should push back, but in the real world, we know that winning the work and taking the hassle of reviewing and signing the customer’s MSA might just be something you have to suck up.
But the problem with client-created MSAs is that they are often created by in-house lawyers with no real understanding of what SaaS is. Nine times out of ten, you’ll be presented with what feels more like an MSA you would give to a contractor or agency creating some original work for a client, rather than a subscription to an existing service.
This confusion is what generally leads to four red flags that you have to jump on.
Red Flag #1: Intellectual Property Ownership
IP is complicated if you are a consultancy building something for a client: there is ‘background IP’ (ie the IP you already have that belongs to the consultant and will continue to belong to the consultant after the project) and then there is the IP that the contractor is being paid to produce for the client. Naturally, they want to make sure there is no question over the fact that they own what they are paying for.
But as a SaaS company you aren’t building them anything bespoke (unless you are and if you are, the main SaaS element will need to be carved out). This isn’t you being pedantic: any sniff that they own any of your IP has to be removed. This is central to your whole business. If you suddenly don’t own the IP to your own platform then you are screwed. This includes the existing IP, but also anything that you develop going forward on your platform whether or not you did that to improve things for a specific customer’s benefit.
Any doubts, speak to a lawyer. Under no circumstances allow any aspect of your platform to be owned by anyone but your company.
Red Flag #2: Uncapped Liability
Another favorite is either uncapped liability or liability that is grossly OTT for the level they are paying you. If you are being paid a few thousand dollars a year in subscription revenue, having a liability that is capped at $5m feels a bit unbalanced.
Typically you should be able to suggest either the sum, or twice the sum, of the total amount of fees they have paid you in the previous 12 months (over the lifetime of your relationship together, not per incident).
Red Flag #3: Non-compete clauses
Again, possibly makes sense if you are building something bespoke for a client as a consultant and there is a lot of proprietary knowledge you are being given. But as a SaaS company it’s a total non-negotiable.
The whole basis of SaaS is that you have solved a problem for a group of customers that is universally felt. The benefit to them is they don’t have to spend the millions of dollars you’ve invested to solve the problem themselves and can subscribe instead. The benefit to you is that you can get enough people to subscribe to the service to more than cover the time and costs you have sunk and continue to sink into it.
Suggesting that you can’t sell it to anyone else is dumb. If they want something unique, they need to create it themselves, otherwise enjoy the fact that they get all of the multi-million dollar functionality for the cost of a subscription. There is another consideration too: many SaaS companies have a self-serve function, so even policing a non-compete would be pretty much impossible.
Red Flag #4: Termination for Convenience
This is a classic. If you sign up for a year’s contract, you don’t get to cancel after 5 months just because you feel like it. This is because the cost of acquiring the customer and onboarding them etc is all factored in to an annual subscription price. It wouldn’t happen if you or I tried to pull that on a mobile phone contract or a gym membership: especially if there was a discounted rate for taking up an annual subscription over a monthly one.
Would it be a deal-breaker? Probably not for a big enough client, but you may have some leverage if you publish a more expensive monthly rate on your pricing page and can just say something like: “if you want to terminate for convenience that’s totally fine, but you would need to move to the monthly subscription rate which is 20% more expensive”. Then see if the extra cost is ‘convenient’ or not. Hint: it’s probably not.
If you can keep an eye out for these things, chances are you are making any real lawyer work a bit less onerous if and when you have to start paying external counsel for advice. But remember my caveat that I’m not a lawyer and this is more of a guide than any actual advice you should rely on.
