How to negotiate a Software License Agreement like a Pro

Whether you are in the software development business be it a company or a solopreneur, or you’re a company or solopreneur looking to purchase a software that will facilitate your day to day business, you’ll most probably need to enter into a contractual relationship with another party (be it as a licensor or a licensee). That’s when the Software License Agreement enters the equation.

The Software License Agreement is basically just a legal document, entered into by the licensor (the software developer) and the licensee (the end user of the software), the purpose of which is to protect the legal rights of each of the parties, such as IP rights, proper usage of the software, potential liabilities, term, payment, establish their obligations and much more which we will cover in this article.

I know that a lot of times you can be in the beginning of establishing your business and maybe don’t have the luxury to consult with a pricy lawyer (or maybe just the right lawyer), so next time you find yourself on either side of the negotiation of a Software License Agreement, you can follow this easy but crucial steps to be able to negotiate like a pro.

IP Rights

You need to be very careful of the wording used in this term. It should be clearly specified which of the parties owns the IP of the software as it is an invaluable possession. Typically, in Software License Agreements the IP is owned by the developer, because if you wanted to actually sell your IP rights, then you would need another type of agreement. So, if there is any ambiguous and open-to interpretation language being used regarding who owns the IP rights, beware.

Type of License

Is the license exclusive or non-exclusive? Is it transferable or non-transferable? Is the licensee allowed to sublicense it? All these need to be figured out. For example, if you are the licensor (software developer) and you want to license your software only to the licensee, then you need to go for an exclusive license (that means you cannot offer your license to another party other than the licensee), and if you don’t want the licensee to be able to transfer, then it should also be non-transferable. So, in this term aim for clear and no BS language regarding the type of license that is being regulated in the agreement in order to avoid potential legal issues in the future.

License Restrictions

We just covered the license type, and you might be wondering why do we need restrictions also. Isn’t the license type enough? Well, NO.

One of the things that must be included in the agreement, is the license usage restrictions, which basically means what the licensee is not allowed to do with the licensed software.

When we talk about the restrictions, it can vary from:

• is the source code being shared with the licensee or not;

• is the licensee able to sub-license, transfer or distribute the software or not;

• does the licensee have the right of reproduction, distribution, etc.;

• can the licensee use the software in order to develop tools that might compete with said software; and more.

Scope of the agreement (also referred as Purpose)

Although sometimes it may be a bit tricky to clearly write down how the software is going to be used by the licensee and for what purpose, so you need to make sure that the language is not ambiguous and try to be as detailed as you can and need.

For example:

• how many users can install and use the software (more often than not, the bigger the number of users, the bigger the fee);

• where can your software be installed (device installations);

• how should the users use your software;

• what is the software going to be used for; and much more.

So, as you can see, there is a lot that needs to be covered in this term. However, try to be as precise as you can be in order to set the usage terms from the get-go.

Maintenance and Support

This is another term found commonly in software licensing agreements. You need to make sure that the maintenance and/or support services you offer are specified, along with the necessary parameters and timeframes. It might seem like tedious work, but specifying the way maintenance/support is offered will save you a lot of headache down the line.

For example, this term can include:

• when scheduled maintenance is happening and when the other party should be notified of such maintenance;

• how upgrades and/or updates will occur;

• how should requests for maintenance/support be submitted and how long till maintenance/support is received;

• is the maintenance/support offered remotely, in premise, or both, and more.

Limitation of Liability

Now this is one of those terms that kind of activated when all hell breaks loose between the parties. Ok ok, maybe I went too dramatic there for a moment, but, when it comes to this term, you need to be attentive.

Each of the parties would like to limit any liabilities that derive from the agreement in case things go sideways and one of the most used methods for this is capping the liability. So, think hard and long about the cap that you are comfortable with, be it the one you might have to pay, or the one the other party is going to pay to you for the caused damages.

Warranties

Despite the limitation of liabilities, both parties also need to include in their agreement the necessary warranties so that they can enjoy the necessary protections. For example, one of the most common reason for using the warranties is to protect the licensor from the unrealistic expectation and requests of the licensee regarding what the software can do, or if they have some expectations regarding the software being customizable or request the software to be integrated with a third-party software. As you can see, the warranties can be of great benefit to both parties when the expectations are duly clarified.

Data Security

With data protection regulations becoming more and more strict and difficult to navigate in the today’s technological and “borderless” world, it is crucial that this term is negotiated very carefully and intently so that both parties can be compliant with the laws and regulations in force considering how expensive the penalties are, but also so that the reputation of your businesses remains intact.

Some information that should be included here might be:

• is data being processed;

• what kind of data is being processed/transferred;

• what security measures are being applied;

• encryption parameters;

• where is data being stored and/or transferred;

• how long will the data be stored, and more.

Pricing and Payment Terms

When it comes down to it, all business deals, and therefore agreements, are essentially made to facilitate the offering of a product or service, in exchange for money. And as you know, when it comes to money, this is where most conflict starts to arise.

So in order to be as safe as you can be, make sure to outline all the fees and expenses, where and how the payments will occur, when payments are due, penalties in case of delayed payments, grace periods, etc..

Term and Termination

This is one of the most critical terms of any agreement. Be sure to include the specific term of your agreement, when it is to start, if there are renewals, if the latter can be automatic or not.

Another important thing to keep an eye on is when such agreement can be terminated and how (basically notice periods for termination). Agreements may end because the term is over, or even in some flagrant cases that the parties outline in the agreement. Therefore, be careful when negotiating the points stating that the agreement is immediately considered as terminated if specific scenarios occur.

As you can already tell, there are a lot of things to look out for while negotiating a Software Licensing Agreement, and this article can help you become more aware of the complexity of the agreement. Although I have tried to give you a rather extensive list and some tips and examples of what the terms should include, please keep in mind that no two agreements are the same and the more tailor-made and fit-for-purpose your agreement is, the better.

So, if you need help in negotiating your software licensing agreement, or even draft it from scratch, feel free to reach out because I am here to help!