Business

A client asked me today if it is more usual for customer payments to be in advance or in arrears in Software-as-a-Service (SaaS) license agreements.  It is a great question as this is a common point raised in licensing agreement negotiations. 

The nature of a SaaS law license is that it is a subscription transaction.  There is a guaranteed term with a right to some use of the technology.  What makes SaaS transactions unique is the collaborative support services that support the license.  Some attorneys want to treat these transactions as service engagements rather than software licensing - but true to the heart of any SaaS transaction, it is a license to use the technology.  There is scope of use, restrictions on use, user seats, types of seats, IP restrictions and other common licensing terms.

This is key when chosing a pricing model as it should be priced as a software license (which requires the water to be turned on) rather than a services engagement (which requires delivery and acceptance).  Regarding the guaranteed term, most SaaS licenses are either on-demand (client pays as they use) or term subscriptions (e.g., monthly or annual rates regardless of amount of use).  For the on-demand licenses, payment terms are easy - they pay as they go. 

For the installment payments, payment terms should be set based on the nature of the SaaS tool itself.  If the payment is based on some variable component, such as a savings level acheived through the technology, it should be in arrears.  If it is a structured payment schedule, it might as well be in advance.