Top Mistakes Made in Software Deals without the Representation of Experienced Software Counsel
I was recently asked for a list of the top mistakes the average company will make when they enter into a software deal without getting an experienced software lawyer involved early in the negotiations. I thought it was an excellent question, so I wanted to share my thoughts on the issue with this audience.
First and foremost, the most common mistake I run into with all types of technology negotiations, but especially with negotiations in the software space, is that companies handling their own software negotiations often end up negotiating with the wrong contract as the starting point. For example, the parties may negotiate from a software license template when they need a SaaS agreement template instead, or they may negotiate from a master services agreement or a hosting agreement when the deal they were doing actually involved SaaS terms. A knowledgeable software attorney will know and understand that the terms of a well-drafted template will be completely different based on the technology model under negotiation and will be able to ask the right questions in order to identify the right technology model and therefore the necessary baseline terms that need to be addressed in a well-drafted agreement.
Another common issue I run into is that even if the parties choose the right initial type of contract to begin the negotiations with, they begin the negotiation with a template that was designed for an entirely different product or relationship than what is currently being contemplated. Obviously, it is going to require less negotiation to reach a good deal when the starting point for the negotiation is a set of proposed terms that applies to the right type of technology transaction and the particular product or relationship under negotiation. Also, the terms of the signed contract are far more likely to be meaningful when they were developed around the right product and services. Otherwise, they are likely not to include the key deal terms or contemplate any of the issues that could come up between the parties. I see many signed contracts that are little better than a handshake because the terms agreed to are almost completely irrelevant to the transaction. An experienced software attorney is going to be able to ask the right questions to determine whether the contract terms were written for the appropriate product or services.
A third issue I run into is that the contracts do not sufficiently contemplate how the relationship will evolve over time. A standard practice in the industry is to rely exclusively on a list of prices to determine on the fee-related issues in the agreement. What is typically missing is all the terms that explain how the pricelist will be implemented. While this might not be fatal to the relationship if there is some sort of initial agreement on the price to be paid overall, few software business relationships in 2018 are up-front, fixed price relationships. Most relationships now are intended to generate recurring revenue streams and anticipate new fees as new seats, services, and functionality are added. So, a mere pricelist is almost never adequate to support an ongoing relationship. Thus, if an experienced software attorney is not involved with the deal, there is a high likelihood that the contract signed will not have all the necessary terms to explain precisely how all the fees will be assessed going forward.
A fourth issue typically overlooked by a contract negotiated without the assistance of experience software counsel are all the technical concerns about the transaction. In many software deals, the service level is absolutely critical to the transaction. However, more often than not, the service level agreement being relied on by the parties was copied off the Internet and has absolutely no significance or relevance to the service being offered or provided. Also, even where the service level agreement was obtained in a more thoughtful way, it is very common to find the agreement full of terms that are so poorly written or that have so many carve-outs that it is completely unenforceable. In addition, many relationships contemplate the performance of a variety of services which are never addressed in the contract at the technical level required to reach any sort of understanding regarding those services. An experienced software counsel will be able to ask the right questions to understand all the technical aspects of the deal between the parties and will be able to determine all the terms that have been omitted from the contract before it is executed.
A fifth issue typically missed when a contract is negotiated without the assistance of experienced counsel is the contemplation of all the issues that could arise with regard to the suspension of services. In 2018, the service provider frequently has the ability to “suspend” a company’s access to the software and the data stored therein at any time and could just as easily erase all of that data. However, few contracts that I see really address the issue of suspension at the level required to address all possible issues that could arise between the parties. An experienced software counsel will ask the right questions to identify these issues and address them in the contract.
A sixth mistake that I often encounter is contracts that contain elaborately negotiated indemnification clauses but never really contemplated all the related issues such as whether the indemnification could ever be enforced and whether the focus of the indemnification clause negotiated was on the liabilities most relevant to the transaction. An experienced software counsel will be knowledgeable about software indemnification clauses and all the issues relevant to the clauses in order to ensure that the maximum amount of protection is in place.
The bottom line is that an experienced technology transactions counsel understands technology sufficiently to ask enough questions about the relationship envisioned to determine all the key terms that were never contemplated in the agreement, and can add that additional level of skill and expertise to the negotiation of the deal that a general business lawyer or business person simply cannot. Technology deals are fundamentally technical and only someone that understands technology and technical deals sufficiently is going to be able to evaluate proposed terms sufficiently to negotiate them appropriately in order to look after the party’s best interests.