SaaS Terms of Service: Ultimate Mistakes to Avoid

terms of service excerpt

What are Terms of Service?

Simple: Terms of Service are a contract between a SaaS company and its customers.  “EULA,” or “End User License Agreement,” is the common name for on-prem software’s analogous legal document.  You might sometimes see “Terms of Use” or “Service Terms” or “Subscription Terms” or “Subscriber Agreement” used as the title of the contract between a SaaS company and its customers – they’re usually all the same type of contract.

Who needs Terms of Service?

Every single SaaS company needs Terms of Service, no matter how small.  If you’re selling some cloud-based software product, you need Terms of Service.

How important are Terms of Service for a SaaS company?

Incredibly important.  Like the-single-most-important-contract-the-company-has important.  Aside from the lease of the espresso machine, of course.  All joking aside, well-drafted Terms of Service allow a SaaS company to have a huge amount of agency over the commercial and operational aspects of their relationship with their customers.

Selling SaaS without Terms of Service would be like having to drive a car through an obstacle course while the car’s steering wheel locks in place every 5 seconds for a 5 second duration.  It’s not even a thing.  Well, it is a thing, and it’s called a “handshake deal” and the shoulders of the proverbial Road to Success for SaaS companies are littered with the bodies of former SaaS companies who made them.

car on obstacle course

Can I just copy some other company’s Terms of Service and call it “good enough?”  I’m smol.

It’s true, penny-wise and pound-foolish SaaS company founders have been known, from time to time, to copy and paste some other company’s Terms of Service, edit it a bit, and present it to a prospective customer as their own.  In addition to potentially raising copyright infringement issues, this is a terrible idea. 

Non-lawyers sometimes assume that contracts are like commodities – each is more or less the same as the next as long as they are in the same category.  A bushel of corn is a bushel of corn, right?  Well, no, and doubly no when it comes to Terms of Service. 

Well-drafted Terms of Service are and should be created to address the unique circumstances of the SaaS company that will be using them.  I can hear the “well, actually” now.  No, you’re not like every other SaaS company.  Yes, there are plenty of things about your SaaS company that are unusual.  Alternatively, the “mix” of attributes of your SaaS company is unique or unusual.

I am not a lawyer but I can read and write English and I think I understand contracts when I read them!

As a reasonably intelligent person who is fluent in English it’s tempting to believe that you can read a contract and understand its meaning and effect.  That might actually be partially true for a sentence or two, but the reality is that while contracts are drafted in English, it’s not the English you know. 

Words do not have the same meaning in a contract that they have in everyday life.  Further, there are layers of meaning and significance attached to words, litanies, or entire provisions to which a non-lawyer is completely blind and unaware – think The Matrix.  Attempting to draft any part of a contract without the proper training is a fool’s errand. 

An analogy I like to use is to software development – I can read and write English and numbers, so I can read and write Python script, right?  It uses English words!

Do Terms of Service address everything about the customer relationship?  Is it all we need?

Terms of Service address a lot of the important aspects of a SaaS company’s customer relationship, but not all.  Terms of Service typically live within an ecosystem of related legal documents that I like to call a “contract stack” as a nod to software engineers and their helpful abstraction, the tech stack. 

Think of Voltron – the Terms of Service are the Black Lion.  Terms of Service are the central and most important part of the contract defining a SaaS company’s relationship with its customers.  Who are the other lions?  Typically Terms of Service will work in concert with (1) a Data Processing Addendum, (2) a Privacy Notice, (3) an Acceptable Use Policy, (4) a Master Services Agreement or some sort of related services addendum, (5) an SLA (Service Legal Agreement) or some manner of Tech Support terms. 

Depending on the SaaS company in question, there can be dozens of other documents that assist the Terms of Service in defining the customer relationship, like Trademark Usage Guidelines, for example, but for brevity’s sake we’ll omit a discussion of these here.

voltron lego
Source: Brickset (CC BY 2.0)

What do bad Terms of Service look like?

Bad Terms of Service can take any number of different forms but they all do the same thing: they expose the SaaS company to operational, commercial, and/or legal risk. 

Let’s look at some examples.  What if one of the features of one of your subscription tiers is subject to a usage cap or usage-based pricing?  Does your garden variety Terms of Service account for that?  What if it doesn’t?  Can you end up having to provide your customers unlimited API calls, for example?  What if those API calls are a back-to-back to a third-party service or infrastructure provider that is, in turn, charging the SaaS company on a usage basis?  Oops, your contract didn’t address that scenario?  That’s a commercial risk example. 

Here’s an operational one: a few words in a Terms of Service require a SaaS company to provide written notice to its customers that the Terms of Service are going to auto-renew when they come up on their one-year anniversary.  SaaS company’s Operations Department never operationalized that workflow, a key customer blows through their 1-year anniversary (at which time the Terms of Service have expired and don’t govern the relationship) without a notice from the Operations Department.  Accounting Department booked and reported the revenue.  4 months after the would-be auto-renewal the key customer sends notice of termination, effective immediately. 

Legal example?  Sure!  Terms of Service cap the SaaS company’s liability to the customer so the customer can’t sue the SaaS company for more than X amount of money.  Done and done, boys!  Great work everyone!  Imagine now that the SaaS company’s customer’s customer (not a typo) is majorly harmed by something the SaaS company’s customer did and that harm was contributed to by the SaaS company’s product itself (and the customer’s use of it).  Customer’s customer sues the SaaS company.  Ruh roh!

What do good Terms of Service look like?

Good Terms of Service do two things. 

First, they fit the unique facts and circumstances the SaaS company (for whom they are designed) finds itself in.  Anything less leaves risk exposure.

Second, they accomplish certain core, “table-stakes” goals that are common to many contracts, such as limitations of liability, indemnities, disclaimers of warranties, and intellectual property protection and preservation.

Oh wait, there’s more.  Good Terms of Service work in harmony with other elements of the “contract stack” (see the Voltron analogy above, or, for Transformers Fans, Destructor). 

Good Terms of Service consider Change Management a dear, dear friend, and go above and beyond to future-proof.  On more than one occasion I have opened a contract, sweaty-palmed about a hairy scenario, only to find that some real-life genius of a tech lawyer had, years ago, added a provision that didn’t even apply to what the SaaS company’s business looked like at that time, that saved the day.  The tech lawyer anticipated a possible future problem, perhaps from hard-won, bitter experience.  That is what good Terms of Service look like.

If I get a tech lawyer to help me create good Terms of Service, what does that entail?

For Terms of Service to fit like a glove, there is a significant amount of fact-finding that needs to be done by the tech lawyer drafting them.  That means dozens and dozens of questions.  And they may come in waves as the tech lawyer digests and reflects upon the information received, begetting sets of follow-on questions. 

It might mean reviewing marketing materials, design documents, and dataflows.  It might mean reviewing pre-existing contracts the SaaS company has with certain key vendors.  It might entail a certain level of elementary industry education if the SaaS product is not industry-agnostic, such as a product that’s targeted at railroad companies.  It might entail the tech lawyer retaining other lawyers who have expertise in certain niches germane to the SaaS company’s business. 

Or it could include very little of this, depending on the complexity of the business and its product.  One thing is certain: if there isn’t much in the way of fact-finding during the process of creating the Terms of Service, you might want to think about getting a second opinion.

mountain railroad

Do Terms of Service ever need updating or are they set-and-forget?

Best practice is to have some sort of cadence for reviewing Terms of Service, if for no other reason than that laws and regulations are living, evolving things, and new laws and regulations are born all the time.  But the more common reason Terms of Service should be regularly reviewed and updated by a qualified tech lawyer is that businesses evolve. 

SaaS products, in particular, are, by their very nature, ever-evolving things.  Remember all the talk about the Terms of Service reflecting the lived experience of the SaaS company itself?  Well, as that experience changes so too must the Terms of Service.  I have seen stale contract templates fold like a cheap suit in the face of a novel fact pattern born of the winds of change, and it is a sad sight.

What are Terms of Service not?

Get this: I have seen websites (and contract stacks) of public software companies that literally confused Terms of Service with Web Terms.

What are Web Terms, say you?  Web Terms, or “Site Terms” as they are sometimes called, are an entirely different contract.  Web Terms define the rights and obligations of, on the one hand, an end user (a member of the public) who is visiting a web site and the owner of the web site on the other hand.

Web Terms are a very important contract in their own right, but they serve a vastly different purpose.  Speaking of which, I have seen websites of public software companies that do not have Web Terms, presumably because they think their Terms of Service are sufficient.  Terms of Service should not address a SaaS company’s website.  Having said that I have seen Terms of Service that attempt to be a hydra and double as Web Terms.  Not pretty, not recommended. 

Confusingly, Web Terms are sometimes titled “Terms and Conditions” or even “Terms of Use.”

example of a SaaS company's footer with Site Terms highlighted

How much does it cost to create Terms of Service from scratch?

Cost will depend on a number of factors but any good tech lawyer will work within the client’s budget (within reason).  The complexity of the SaaS company’s business will dictate the time and cost required.  Somewhat paradoxically, the more experience and expertise the tech lawyer has in drafting Terms of Service the less it will cost per unit of quality, if you will; in other words, it can be cheaper to hire a more expensive lawyer.

As a back-of-the-napkin I would plan on a minimum of 8 hours, cumulatively, for a final draft.  A Series B that needs a re-do of an existing Terms of Service and wants a thorough, kick-butt document that will take them through their IPO and beyond might be looking at upwards of 20 hours.

Many tech lawyers, like I, work with customers on billing structure, offering fixed-fee, hourly, and hourly-but-with-a-cap arrangements.  These days, at least in the U.S., rates for licensed attorneys range from $300 to $1,500+ an hour.

I need Terms of Service like, right now.  I have my first prospective client and can’t keep them waiting.  How much lead time does a tech lawyer need to create my Terms of Service?

Did you tell the contractor remodeling your kitchen it has to be done in two weeks?  How did that work out for you?  Anything you can do to buy time in this scenario is a good thing – maybe tell them you have your lawyer ginning up a special contract because your customers are special?  Your lawyer is on vacation and you need a few days?

All joking aside, quality takes time.  You might find a tech lawyer willing to drop what they are doing and pull off some heroics, but even then, quality may suffer at least to some degree.  The reality is that most successful professionals don’t sit around twiddling their thumbs waiting for the phone to ring, and if they are, that raises other questions.  There are certain tricks of the trade that can be deployed in circumstances such as these.

bored office worker

How long of a contract is a typical Terms of Service?

7,000-11,000 words is typical.  At the risk of sounding like a broken record, the length of the contract is dependent, in part, on the complexity of the SaaS company’s business and product(s). 

I got my first version of my Terms of Service from my lawyer and they don’t look like [Big Tech company’s] Terms of Service – what gives?

Do not compare the Terms of Service of a “normal” SaaS company to that of a FAANG.  For starters, FAANG companies have businesses that are mind-boggling in their scope and complexity.  Remember all the stuff I wrote about Terms of Service being tailored to the business?  That explains a lot of the difference you’re seeing. 

Another reason that comes to mind is that these companies have so many tech lawyers with so much brain power that they are charting new territory in their contract stack – they are drafting things for which there is no historical precedent, and the businesses they support are building and commercializing unique, cutting-edge services.  I would be more concerned if a “normal” SaaS company’s Terms of Service resembled that of a Big Tech.

What if my company markets and distributes its app solely through an App Store or App Marketplace?

You’re still going to need Terms of Service, but there are special considerations appurtenant to such a scenario.  A good tech lawyer will help you address them.

Do Mobile Apps need Terms of Service too?

They sure do, but the presence of a local client changes the requisite contract structure and content significantly.  Regardless, squarely within the strike zone of a good tech lawyer.

app store on phone logo

Can I just, like, get a template off one of these legal websites that’s at the top of the search results?

Are we…did you read this whole piece only to still have this question at the end?  Please see the above discussion about copying and pasting another company’s Terms of Service.  Do you want some contract written by a non-attorney on another continent that has little to do with your business’ reality?  While you’re at it, why don’t you just outsource the build-out of your codebase?  Code is code, right?

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