When you start selling your SaaS to larger customers, some of them will inevitably ask for custom contracts. Large companies can have many different reasons for not signing your SaaS standard Terms of Service (TOS), Data Protection Agreement (DPA) or Service Level Agreement (SLA).
In most cases their legal teams request changes to protect their company from what they estimate to be downside risk. But sometimes the only reason is so they can internally justify their budget, size and importance. And that can be annoying.
Recently I have been negotiating a number of SaaS contracts for Quaderno. It was a time consuming process, which made me wonder how others handle these situations. So I asked a few founders of bootstrapped SaaS companies. What I found surprised me.
All said in similar terms (slightly edited so I can publish it) : “I always directly say no to all requests for custom contracts.”
On further probing, it turned out that most rejections of discussing custom terms are mainly motivated by an aversion to bureaucracy.
Never accepting changes to standard SaaS TOS, as well as signing custom contracts can both be great decisions. However, directly saying no, and not even being willing to look at what changes a potential customers would like to see, is a bad decision for reasons I will get to later.
A rational approach is to take all factors into account when deciding if you will sign custom contracts. Here is an overview of the things you should consider.
The benefits of negotiating custom contracts for your SaaS.
There are various factors that can make it worthwhile to negotiate custom contracts.
- Identify loose ends in your policies & terms. The legal teams in charge of the review will go through your TOS, DPA and other documents in great detail. This review can identify potential issues that might have gone unnoticed otherwise.
You can then fix any loose ends and possibly prevent issues down the road. Moreover, you do not have to pay any legal fees for the review.
- Risks can be a business opportunity. For the contracts I have been negotiating recently, I found it very interesting to see what changes to the standard SaaS terms were requested and why.
Any changes to the contracts that eliminate (perceived) risk for your customers can be a business opportunity. Other companies could be interested in eliminating these risks as well and be happy to pay you a premium for it.
Even if the additional coverage by itself does not justify approaching new customers, updating the standard contract of your SaaS can still be an additional benefit that will make it easier to convince other customers in the future.
- Land A-list customers. The type of companies that negotiate the TOS and DPA often have well-known brands. Publishing them as success stories on your website can be of great value. By saying no to custom terms you will miss-out on a percentage of these customers because they will find a provider who is willing to adapt contracts to their needs.
- Custom contracts may not be optional for your SaaS. Depending on the type of product you sell and type of customers, you might have to negotiate custom agreements if you want to sell. For example, if you sell a product that automates compliance for large insurance companies, custom terms could well be a requirement without which you will be unable to sell.
- Increase revenue. The type of company that wants to have custom terms is usually used to pay higher fees and willing to compensate providers for the additional service.
You not only can, but should charge these customers a lot more because signing custom terms also has a number of disadvantages that you have to be compensated for as you will see next.
Reasons not to negotiate custom terms for your SaaS.
- Direct cost of negotiating. The time you spend negotiating has a value. Possibly you have to higher lawyers to assist you which will further increase the cost.
- Opportunity cost. The amount you have to dedicate to agreeing on custom terms can be significant. There can be lots of back and forth, research, clarifications and revisions. The time you spend negotiating terms you are not developing your product, servicing existing customers, pursuing new clients, or on the beach.
- Increases your risk exposure. Customers generally want to change SaaS contracts to move additional responsibilities to the service provider. This constitutes an additional downside risk for you.
- Managing exceptions is complex and costly. You have to follow through on any exceptions to standard terms you have agreed on. And keeping track of that can be very challenging.
For example, when you agree on following a certain notification protocol with one specific customer in case of a general security breach, you have to ensure it is followed. And that is difficult to manage. It requires someone, who probably has no idea that such agreements exists, to be prompted to take a non-standard action in case of an event. Now imagine having agreed on different protocols with different customers for a range of events and it is not hard to understand the problems this can cause.
- Complicates an acquisition process. If you decide to sell your company at some point, the existence of custom contracts will make the audit process more complex.
- Can negatively impact valuation. Potential acquirers of your company will adjust the price they are willing to pay based on the risk. Custom contracts can increase the risk profile and hence lower the price offered. In addition, the cost of managing all these custom agreements after an acquisition can also negatively impact the price a buyer is willing to pay.
Exercise the free option.
Irrespective of what you decide, outright rejection of all requests to negotiate terms is a mistake.
Simply asking potential customers what changes they want is a free option to a few of the benefits: it may identify loose ends in the terms of your SaaS and can highlight new business opportunity by assuming more risks.
You can always say no in a later stage, after looking at the proposed change. And you might be positively surprised: some companies only request very reasonable contract changes.
Putting it all together.
As with almost everything signing custom SaaS contracts has different pros and cons. Never signing custom contracts can be a very wise decision or a big mistake. Which one it is depends on how you came to that conclusion.
A knee-jerk reaction to bureaucracy is not a good justification to reject custom contracts, neither is conceding things because “it is a big and well-known company.”
What makes sense is specific to your context and that changes over time. No matter what you conclude, hopefully this post contributes to it being a well reasoned decision and ensures that you will never forego the free option!
