Tips on Drafting Vendor Form Agreements

My practice is tilted towards representing licensees and customers who are looking to license software from established software vendors. As a result, I have reviewed countless vendor software license agreements, hosted software/SaaS agreements, service level agreements, and all the related forms and attachments that make up those transactions. However, I also occasionally represent vendors and have assisted in drafting the vendors' form agreements.

In this article, I'll share a few things I've learned on the way by observing these transactions from both sides of the negotiation table.

/1/ Get the Business Team Involved Early

Drafting any new agreement involves considering and including a long list of contract boilerplate language; for example, limitations of liability, warranties, the license grant, venue, and termination rights. Of course, these provisions are necessary to include in the final agreement, but the vendor business teams must also be involved in structuring the form agreement.

The software teams should be involved in provisions related to warranties or service levels involving system availability, any third-party embedded software that may require additional licenses or terms, requirements related to the customer's technical environment, and similar areas. The finance department may wish to have input on the term of the agreement, invoicing and payment terms, and even acceptance testing language. And certainly the sales team will wish to get involved to ensure the agreement contemplates what their customers are typically looking in an attempt to avoid later roadblocks or objections.

/2/ Structure the Agreement to Make it Flexible

The attorney drafting the form agreement must consider the lifecycle of a transaction, which may include proposal responses to RFPs, product demonstrations, customer due diligence, and a number of discussions between the vendor technical and sales teams and the customer representatives. And these discussions all probably take place before any in-house attorney is asked to get involved.

One way to stay out of the way of the early deal negotiations is to provide the business teams with a flexible contract that gives them certain freedoms to change the agreement to reflect the unique transaction being considered. Putting a legal document in front of the customer early in the process may also bog down or sidetrack the process. Instead, consider structuring the main body of the agreement to contemplate some of the different requirements that may come from the customer and keep the business terms segregated into the exhibits. With the negotiable items like contract term, license scope, pricing over time, and delivery schedule all contained in the exhibits, the vendor and customer teams can work together to structure the agreed transaction details before needing to get involved in the details of the main body of the agreement.

/3/ Consider How "Aggressive" the Agreement Should Be

Another area that will involve discussions with the business and sales teams is how aggressive the vendor wishes to make the agreement. This will depend greatly on the negotiation strength of the vendor, the willingness of the legal and sales teams to support what may be a longer negotiation, and the generally view within the market for strict contract language.

If the vendor has a strong position in the market and an established reputation, they may be able to present a very aggressive agreement and hold firm during negotiation, allowing little change. On the other hand, sophisticated customers will consider the contract provisions as part of the overall evaluation of the vendor solution and, if there are other viable options to the vendor's software in the marketplace, an overly aggressive form contract may make the customer consider the relationship with the vendor a "non starter" and move to friendlier pastures.

/4/ Position the Document for Negotiation

The other side of the equation when considering how aggressive to draft the form agreement is to look forward to future negotiations involving the document and consider how the business would like those to play out. Obviously, an overly aggressive agreement will require additional negotiation time from the business, sales, and legal teams. Another approach is to consider drafting a document that is generally fair to both parties with the hope of positioning it in that manner with the customer and fast-tracking the negotiation which will involve only a handful of issues. Of course, the risk in coming to the table with a balanced agreement is that the customer may still negotiate the agreement intensely which may lead to a long negotiation anyway or an agreement that now favors the customer over the vendor.