What You Need to Know About Legal
If you think you do not need to understand sales contracts, think again!
There is a term at AWS we use called “undifferentiated heavy lifting”. It is a bit of a mouthful, but it is our way to describe the value of the cloud. We take care of the boring stuff like managing servers and data centers so that you can focus on things that add value to customers.
In sales, there is also a ton of undifferentiated heavy lifting. Entering in your updates into the CRM system for example. Being better for faster at manually entering data into form fields is neither going to make you a hero to customers or reduce your quota.
There is plenty of other boring stuff as well in sales. Team pipeline and forecast calls that drone on, endless hours of cold calling and prospecting, editing sales presentations, putting together quotes, etc. For me, the big struggle was reading and negotiating contracts.
When I was working at big tech companies, much of this was handled by contracts professionals and lawyers. I still had to manage the discussions around business terms, like pricing, products, service agreements, and the like, but the pros handled the gnarly legalese and contract language.
I wish I paid more attention to the legal discussions. When I left big tech to launch my startup, our customers were all large enterprises. As we got into the contract negotiations, they would look at my five page master software agreement (MSA) and laugh. They would promptly send over a 60 page book of a contract that they insisted could not be negotiated and had to be accepted as is.
Of course, having just left big tech, I was no fool. I learned almost everything can be negotiated. The one thing as a startup that I did not have however was leverage. We did not have the time or the resources to negotiate every single offending term. Hiring a lawyer early on was also out of the question since capital was tight.
What did I do? I learned to figure out contracts. Between Google, a very helpful lawyer friend, and some pro bono resources, I picked up enough to ensure I did not cripple our startup and ensure the critical terms protected our IP and ensured the customer couldn’t weasel out of the contract. I am pretty sure however that our customers got most of their way.
Contracts are a part of business and as a sales professional something that you should understand at least at a high level. If you are selling more transactional SaaS offerings, usually customers just click a box to agree to terms & conditions that outline the rights defining the usage of the software and the responsibilities of both the customer and you as the provider. For complex sales however, you will always need to customize your agreement or their agreement.
The size of the company doesn’t necessarily matter. SMB’s and startups can require lengthy contract reviews, especially those in highly regulated industries like finance and life sciences. Their regulatory and compliance burdens mean greater scrutiny for their vendors.
What if you are new to the world of sales contracts and legal language or you find yourself needing to learn more about this topic. Unfortunately, boring topics like these tend not to get a lot of attention or see much content generation. To help you along the way, I put together a short cheat sheet to guide you into the key elements of most contracts. (caveat is that what is offered here is not legal advice. Always seek a licensed attorney for questions specific to your situation):
Pricing – The fees for the software as well as discounts, pricing for add-ons or features, and fees related to support and implementation, if applicable.
Services – What you provide to the customer, often specified in the Appendix along with Service Level Agreements for support and Statement of Work for implementation.
Payment – Determines how a customer is to pay for services and the terms specifying when payment for fees is due and any penalties for late payment or discounts for early payment.
Term – Covers the length of time the customer is authorized to use the services as well as reasons to terminate an agreement before the term.
Confidentiality – Defines the information that is considered confidential and the expectations for handling such information for both you and your customer.
Intellectual Property (IP) – Specifies that the software, trademarks, documentation, and etc. you provide are your property and the rights you grant the customer rights to use these.
Warranties – Agreement to support the product or services for issues that arise during allowed usage such as bugs, defects, and service interruptions.
Data – Your software will host or interact with the customer’s data, so these clauses specify the handling, ownership, transfer, and export of data.
Indemnity – Protections each other for contract breaches and third party claims like security lapses and intellectual property infringement.
Liability – When there are significant breaches, liability clauses define to what extent you owe damages to the customer.
Statement of Work – Usually placed in the appendix outlining the specific work to be done, focused on the implementation steps, timelines, resources, and deliverables.
Service Level Agreements – Also part of the appendix and outlines how you respond to issues, the escalation procedures, and the remedies for missing SLA thresholds.
The larger the customer organization you work with, the more likely you will be asked to work off of their “paper”. When using their paper, you need to be careful of language that negatively impacts the deal and your company. Legal agreements are obligations and binding for the term of the contract or longer, which can potentially impact future customer agreements. From seeing many contracts over the years, these are the top nine issues to be aware of during negotiations:
Payment terms – Most companies insist on “net 90” or even “net 120,” meaning you do not get paid until 90 or 120 days from when your product / service is delivered. However, you can negotiate this down in some cases to net 60 or less.
Intellectual property – If there are ways to customize or extend your product, you need to define ownership over those “derivative works.” Otherwise it could cause IP issues later when building features similar to those works.
Source code escrow – For tech startups, this was a standard clause. In the SaaS world, this is trickier since the software is essentially rented. Bigger companies will still insist on escrow, but you can sometimes pass the costs of escrow onto the customer if they insist on keeping this clause.
Acceptance criteria – This defines when the software is considered ready for use by the customer. It is important to clarify the criteria because payment for fee and start dates of renewals often hinge on the customer agreeing to acceptance.
Termination for cause – In the case of serious contract breaches, terminating a contract makes sense. Sometimes the reasons are specious however and customers try to include language that borders on termination for convenience. Try to negotiate these reasons out of the contract, or at the very least, add penalties for early termination for those reasons.
Most favored customer – This gives a customer enormous pricing power because any better pricing you grant to later customers extends to them. Unless it is a federal government agency, do everything possible to remove this clause.
Data privacy – If your product or services touches end customer information, you will have a higher bar in protecting data. While you may not be able to waive requirements due to local laws, you can limit liabilities or pass on costs for additional data privacy measures.
Insurance coverage – Often big companies will require their vendors to maintain adequate levels of Errors and Omissions (E&O) insurance and other policies. You may not be able to avoid acquiring coverage, but you can reduce the type and limits of coverage required.
Indemnification & liability – These are often the most contentious of clauses as customers often want their vendors to pay for all sorts of problems that might arise. Your goal here is to set a lower cap for limitation of liability and reduce the scope of items you indemnify your customers for.
There is a lot of information above and this does not even touch many other critical details in contracts such as assignment, sub-contracting, and non-solicitation. As an introduction to the topic though, I hope you find this to be a helpful guide and that you are less intimidated by the thought of having to negotiate and speak to contacts.
If you have experience with MSA’s and negotiating contracts, what would you add to the above in terms of key contractual elements or contact sticking points? Thanks as always for read, liking, and commenting, and look forward to chatting with you again next week!
Mark Birch, Founder of Enterprise Sales Forum
The Enterprise Sales Forum is a professional community championing the practice of sales through monthly sales talks at chapters globally. Our chapters provide an open, collaborative and diverse environment to share new ideas, network and learn actionable insights for professional sales development.