Understanding SaaS Reseller Agreements: Essential Elements and Best Practices

SaaS Reseller Agreement 101

While specific terms may vary, a SaaS reseller agreement generally serves to define the agreed upon scope of the relationship between the distributor and the software provider. The agreement can provide specific contractual terms and conditions to be adhered to by both the reseller and the software as a service provider. It enables a software as a service platform, to expand into new markets through a distribution network, while still maintaining some control over how their software is used .
Common terms found in these agreements can include but are not limited to, pricing incentives and discounts, terms of payment, license restrictions, audit requirements, technical support commitments, condition precedent to the reseller’s capacity to provide a service, termination rights, intellectual property rights, indemnities, warranties, the effective date of the agreement and dispute resolution provisions.

Essential Elements of a SaaS Reseller Agreement

At the very least, both the reseller and the publisher of the SaaS product need to understand these components:
Terms of Service (ToS)
The Terms of Service are the terms that the publisher of the SaaS demands that the end-user accept in order to use the SaaS. Any ToS needs to have certain waivers and acknowledgments that the end-user is consenting to. The end-user should also permit the reseller to act on its behalf with respect to the SaaS and establish some responsibility for the reseller’s collection of payment and bill collection. While the reseller will want to limit his liability for breach of the TOS, his liability is often going to be without limit if the end-user can show that the reseller committed fraud or intentionally breached the agreement or represented to the end-user that he was acting for the publisher.
It is advisable that the publisher keep a portion of the revenue from the SaaS product to the reseller to offset legal expenses. Also to address any provisions in the ToS that the reseller might find objectionable, a mechanism should be put in place to give the reseller notice of an amendment to the TOS and provide the reseller as much notice as possible before the amendment takes effect.
Pricing
Pricing for the reseller acquisition of the SaaS is often based on a percentage of revenue from the sales the reseller makes directly to end-users. There may also be flat fees. A volume of SaaS use or a target revenue amount may be established as the threshold to be achieved by the reseller in order to qualify for certain rights. Alternatively, or in addition to, the reseller may pay a fractional cost for each end-user acquired.
Obligations of the Parties
The SaaS publisher should agree to:
The reseller should agree to:
License Terms
Since the SaaS will only function if it is uploaded to the end-user’s network, the reseller’s contract with the end-user will likely provide that the end-user make a representation that it has the right and ability to permit the upload to its network of a third-party’s software. Therefore, the SaaS publisher must include acknowledgement by the reseller of that condition in the reseller’s contract with the end-user. The publisher will also want to ensure that the reseller will pay applicable taxes on the acquisition and acquisition of the SaaS.
A SaaS reseller agreement must also include other components, but these are the most common terms that need to be in place in order to begin the relationship.

Common Legal Issues in SaaS Reseller Agreements

Critical legal issues that should be considered in a SaaS reseller agreement include a clear definition of intellectual property rights that specifies what the reseller does and does not have a right to use or distribute. Things to consider include whether or not the customer should have the ability to design a custom implementation of the software, whether the reseller should be allowed to charge for enhancement services, the ability of the customer to build integrations for the software, and the reseller’s rights to disclose the software source code to third parties.
Confidentiality clauses should be carefully crafted in order to protect commercial secrets while at the same time preserving both parties’ ability to conduct business. Generally, it is preferable not to allow any disclosures at all, although in certain circumstances it may be necessary to allow limited disclosures to third parties (such as investors) pursuant to a written non-disclosure agreement with such third parties requiring the non-disclosing party to treat the confidential information as the disclosing party does and otherwise maintaining accountability for the third party’s actions.
Liability limitations should be carefully crafted to limit the duration and dollar amount of liability to the reseller and its customers to a level commensurate with the license fees paid by the reseller and/or its customers. Any representations or warranties should be limited to one or two types (e.g., that the software will be able to process a given volume of transactions or other measurable performance standard, or that the software is in compliance with a particular law) rather than an overbroad set that may be found to not be supported by actual evidence.

Advantages of Reseller Agreements for SaaS Providers

Both buyers and sellers of technology often look to third parties to distribute the products and services over the internet and in person, such as Value Added Resellers ("VARs"). When SaaS products are involved, these agreements can be all the more complicated. A reseller agreement is a commercialization agreement in which a third party generally buys a product from a manufacturer or publisher for resale to end users in exchange for a commission or a spread (the latter, a fixed unit price or percentage of the sales price, set forth in the reseller agreement). The reseller is expected to add its own value to the product (and the price) before selling it, hence "value added." This can include but is in most cases limited to providing a platform (i.e., a website) for other businesses to buy access to those products. When the products being resold are SaaS products, then VA reseller agreements can raise a host of new concerns, including:
Reseller agreements for SaaS can benefit a software as a service company in several ways. Such agreements allow for the expansion of a company’s market reach—often into new and/or untapped markets. Reseller agreements can also provide increased revenue opportunities. Such agreements can also involve less risk than direct selling, as a reseller’s commission will be paid only on the basis of revenue generated through sales of the SaaS product. Further, VA agreements can streamline the sales process for SaaS companies, as a third-party reseller may have existing relationships and seller capacity in the local markets where the SaaS provider seeks to sell its products.

Common Challenges and Mistakes to Avoid

In ensuring that your SaaS reseller agreement is a success, avoiding common challenges and pitfalls is critical. For example, a poorly defined term where the licensing rights are granted, a lack of elucidation as to who is responsible for customer support of the services, or inadequate performance metrics can spell disaster for a strategic relationship. As noted earlier in the article, the structure of the pricing metrics for the reseller can be a decisive factor in helping or hurting your Cloud business. For instance, are you licensing the SaaS solution to the reseller at a per user metric, a flat annual rate or a volume discount? Defining the different pricing metrics for a SaaS pricing model is a significant component in aligning the parties’ sales process, so ensuring that the parties harmonize their respective sales process (i.e., cadence of sales, strategic implementation, rollout, customer feedback, contract review processes, etc.) will be critical to ensuring a seamless rollout of the SaaS solution.
Furthermore , failure to address how your company will ensure that your privacy obligations are met, who is responsible for data ownership and/or data retrieval on behalf of the parties can be detrimental in a SaaS reseller agreement. In a SaaS reseller agreement, data ownership is particularly crucial since resellers may modify the data to "enhance" their own services or offerings. As a result of these enhancements, there is a significant risk that the reseller’s clients and/or end users with regard to the underlying data may be confused or otherwise misled, as the reseller begins to identify certain information as its trade secret, and it attempts to enforce various restrictions on how the client or end user can access, share or use the information in question. As a result, clarity is required regarding which party owns the underlying data, and what, if any, rights to the underlying data is granted to the reseller and to its clients/end users with regard to the data.

Best Practices When Drafting Re-Seller Agreements

As with any commercial relationship, the reseller agreement should contain adequate and well thought-out protections for the SaaS provider to address a number of potential issues. A careful balance of rights and obligations – and a focus on minimizing risk – should be reflected in the reseller agreement, as this will give rise to maximum benefit to all parties involved. Whether or not legally required, an appropriate reseller agreement will contain provisions that reasonably: A reseller agreement should also include representations and warranties. Important for parties to a reseller agreement to understand is that representations and warranties can be, and often are, the basis of liability for any breach of such agreement, or for fraud. These clauses must be read carefully from the standpoint of both the seller and the reseller. Some things to keep in mind when drafting these clauses include: It is important to take the time to draft and review the overall reseller agreement carefully, as well as the provision of software and the end-user licensing agreements that will be used between a reseller and a customer. When drafting reseller agreements, think about the customer – how will the agreement look to this customer? In many cases, these aspects of the agreement will be bedrock for any future dispute involving the parties. Make them count. Many aspects of every reseller agreement should be tailored to fit a particular business and its clients, market, and industry. For example, is a party a manufacturer, distributor, OEM, or VAR? Depending upon these circumstances, the type, scope and structure of the agreement may change. In addition, it is important to have the strategies of the parties to be reflected in the agreement. For example, does a party intend to supply a value-added service as part of a larger system? Or does a party intend to apply knowledge and information adjacent to the use of a core program? These specifics may need to be addressed. Finally, each party should consider its risk in its business. The reseller agreement should reflect the realities of the resellers’ market. For example, will the reseller have a long-term relationship with a low margin per sale? Or will the reseller have a short-term relationship with a higher margin per sale? These respective risk factors may need to be reflected in the reseller agreement.

Case Studies: Successful SaaS Reseller Agreements

Consider these examples of companies that have effectively navigated the reseller agreement landscape- using well-crafted contracts to expand their reach and market share.
A construction analytics firm was looking to scale its business without a major investment in its sales team. It formed a strategic partnership with an established software provider in the construction industry. This partner utilized its existing relationships with general contractors to sell the analytics solution alongside its existing packages. "Instead of trying to get a voice at the table in the sales process, we’re now the only analytics tool they recommend" — says the company’s chief revenue officer. The partners leverage each other’s sales teams and marketing funnel to grow their respective user bases — and have become trusted brands in the construction community-engendering trust and referrals from customers who have come to rely on the partnership for trusted solutions .
An online invoicing platform saw an opportunity to deepen its partnerships with lawyers and law firms — at a time when more and more lawyers were abandoning traditional billing practices that often left them (and their clients) frustrated and unhappy with the lawyer’s fee. The invoicing provider began offering its solution to lawyers and doctrines, allowing their members to use the software for free at first, and then offering a paid upgrade option once member’s got accustomed to the software. The platform provider was able to significantly grow its user base while providing a solution to a few generations of lawyers who were looking for more effective ways to manage their billing practices. "There are some industries that can be slow to adapt to new technologies — and law is one of them" — said the company’s chief marketing officer. "We needed them to understand what else our product can do for them. We were able to get the buy-in we needed by creating a direct channel into what they consider a trusted resource and authority."