One out of three consumers agree that not reading software agreements might result in a loss to their business in the future. Yet they choose not to because of how lengthy, time-consuming, and complex they are. If there's one thing to learn from the increasing supply chain attacks - including the massive one that happened to Solar Winds it is that your security depends on how trustworthy your vendors are.

The percentage of organizations exposed to supply chain attacks has grown from 42% in 2020 to 62% in 2021. 

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If you're looking to save your company from the potential risks and damages that might arise due to poorly drafted license agreements, this guide is meant for you. Dive deep into the basic structure of a software license agreement, skip the legal fluff and understand the important clauses and pitfalls to consider before purchasing any software.

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What is a software license agreement?

A software license agreement also referred to as an End-user license agreement (EULA), is a legal document between you (the licensee) and the vendor (the licensor). In other words, it's exactly as it sounds: it explains how and how not the piece of software must be used and sets out the rules for both parties.

Users believe there is no means to access the software if they are not comfortable with certain terms. But the truth is, most of them are negotiable.

While the concept of software licensing can be a paper agreement, it is most often embedded in the software itself as part of the installation and purchase process. In larger businesses with more users, the agreements tend to be more complex and require considerable legal advice to manage and negotiate.

As most of the software is ‘licensed’ and not sold to you, an agreement protects the vendor’s copyright and intellectual property rights by building restrictions on your usage. For example duplication, multiple installations, modification of code, transferability, or changing the software in any way is usually impermissible.

Though these license agreements are drafted in favor of the vendors, it can’t be ignored that not knowing what’s included in them exposes potential financial, safety/security, privacy, and other losses to your business.                                              

As these threats and attacks can be reduced to a certain extent through a strong vendor-user contractual relationship, businesses are now being more strategic with their procurement and contract creation process.

5 Types of Software Licenses You Need to Know About

Now that we know what software license agreements are and why you should pay attention to the terms now more than ever, let’s look at the 5 common types of software licenses you should know about.

1. Public Domain License

Software licensed as public domain is one of the most diversely available and anyone is free to use and modify codes without any restrictions.

It is also referred to as permissively licensed and allows users to reuse the software as required.

Software that does not fall under specific licensing terms is not always public domain code. Be sure the software is genuinely public domain before copying, reusing, or distributing it.

2. Proprietary License

These are the most restrictive software out there that prohibits its users from any forms of modification, reuse, or distribution. License agreement for these softwares explicitly explains the terms of use to protect the developer or vendor from threats and attacks.

3. Lesser General Public License

The vendors have the right to link their software to any open source license. The problem here is that if any part of the code linked to open source is modified or removed, the original LGPL license will also be modified. This can result in poor performance, loss of functionality, and much more.

4. Permissive

Permissive software licenses are the most common ones. They have very specific requirements and restrictions for distribution and reuse. It can include perseverance of copyrights, acceptable use policies, and trademark requisites.

5. Copyleft

Copyleft Licenses are also referred to as reciprocal licenses. The license code may be modified and distributed if the new code is distributed under the same software license.

In simple words, if the new code mentioned in the license was for “enterprise use only”, the new piece that has been modified should also carry the same code/designation.

Difference Between Software License Agreements and SaaS Agreements

“We often lump SaaS agreements and software license agreements together because they both involve the use of software functionality. But the rights and obligations are very different. SaaS agreements offer customers access to the programs, while software licenses share copies of the software itself. This nuanced difference means that we need to use different terms in our agreement.” - Laura Frederick, Founder of How to Contract.

1) Accessibility

If you purchase and install software, and in a few months the software doesn’t work properly, there might be a problem with your IT system. In such cases, the vendor is liable to only provide technical support to the extent to find what the problem is. The agreement doesn’t hold them responsible for correcting the fault.

Whereas in the case of SaaS agreements, if the service stops or doesn’t work properly, it is the liability of the service provider to correct it.

So be it, a SaaS or a software license, the agreement should clearly explain the following terms before agreeing with either of those:

1. Response time
2. Extent of Support
3. Contractual liabilities
4. Estimate of downtime/maintenance

But the downside of accessibility in software is that the versatility is very restricted. If you plan on expanding your business or accommodating more users, the software isn't as flexible as SaaS to meet your changing requirements.

2) Information and Data

The information and data in SaaS are stored in the cloud and not on your own premises. So, the agreement deals with the regulations about storing and transmitting data in the system. The vendor is held responsible to provide information especially if your data is collected and stored.

Whereas a software license agreement doesn’t have to mention any terms on this. You are liable for the storage and backup. So, if any mistake has happened resulting in a data breach, it's on you.

3) Pricing Terms

Software license payments are far more diverse than you can see with SaaS agreements. They have pre-paid,royalty-free, perpetual, or fees tied to the number of end users. Whereas with SaaS, the terms are standardized based on the subscription model, functionalities, use policies, and the number of end users. The downside with SaaS pricing terms is that you don’t have much visibility over the usage. It becomes difficult to track spending after each subscription term, especially if you are dealing with multiple SaaS at once.

PRO TIP: Luckily, Spendflo is on a mission to eradicate this problem once and for all. Talk to our expert lead buyer to get good deals on all the 100+ SaaS tools you use and cut down on negotiation times for each of those 100+ contracts.

4) Distribution Rights

Software licenses have very few restrictions on sublicensing, distribution, and modification. SaaS agreements are way tougher on these terms on who and how many users can access the service.

Bottom Line: A software agreement is a licensing agreement where the user receives a license to use software for a specific amount. Whereas, in the case of SaaS, the user subscribes to the service provided by the vendor without getting a license. 

‍Anatomy of a Software License Agreement

1) Scope

This section includes the definition, functions, and basic terms of use of the software. You will also find terms on when the agreement will go into action, how long the agreement will be active, and the type of license. It sets the tone for the entire document. The section should answer most or all of the following questions.

1. Who is the “licensee”? Does the definition of licensee extend to subsidiaries, third parties, or any affiliates?
2. What are the license parameters? It is often titled ‘Use’. Is ‘Use’ unlimited or tied with parameters like the number of end users?
3. What is the process for the expansion of user’s rights? If you want to add more users or automation, what are the notice period and payment terms?
4. Beyond installation, what else you can do with the software? Make modifications or re-use?

2) Restrictions

In a software license, you are generally restricted to using the software application for internal growth purposes, and not for a third party or on a leased, rental, or service bureau basis.

Sometimes, you are prohibited from distribution, sub-licensing, or providing third parties with access to the software. Consider how the  exceptions are made and how certain exceptions can impact your business(eg, a merger or expansion)

3) Confidentiality and Data Protection

You should have the right to know what access your vendor has to the software premises (eg, warranty, support, updates, maintenance, etc). Data protection and security provisions can be negotiated by both parties depending on the jurisdiction. Some software even has a separate agreement for data and security terms.

4) Warranties and Remedies

Software license agreements include a variety of warranties including infringement rights, viruses, and disabling features. Sometimes, vendors resist infringement and intellectual property rights and agree to provide you with an intellectual property indemnification provision instead.

5) Liability

The software license agreement typically caps the vendor’s liability. The amount is used for compensation for incidental, proprietary, and indirect damages that are recoverable from the provider.      

Wrapping Up

Carefully reading and evaluating a software license agreement can sound absurd, but it's the norm. 

Failing to do so can expose you to a lot of threats and as you can see here can be detrimental to your long-term needs.

This guide should serve as a jumping-off point for your agreement negotiation process to save your company’s software spending.

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