Enterprise Software Agreement: How to Design Yours!

This is an issue near and dear to me, as I have spent a large part of my career drafting and negotiating enterprise software agreements. However, I found that many companies seeking growth capital or a venture capital investment are trying to figure out how to design their enterprise software agreements… so some thoughts on this (from a software attorney) would/should be helpful.

1) What is Enterprise Licensing? Essentially, most software companies have a licensing model wherein they provide their software to their customers based on some licensing metric (user, computer, device, division of a company, revenue, etc.). This often works well for small and medium size customers, but not necessarily for large customers (enterprise customers). If you think about it, enterprise customers want something more: flexibility, discount/predictable pricing, and ease of administration if they are going to commit to a large license purchase of your software. So long story short, an enterprise software license can mean many different things to different software companies and enterprise customers; therefore, you need to define what it means to your company and to your large customers. By the way, some customers call an enterprise agreement an agreement under which they can purchase software at a discount company-wide for a certain period of time. I am not saying they are wrong, but the key here is to figure out what your enterprise customers need or want.

2) Factors to Consider when Designing Your Enterprise License. First, I want you to think about what your enterprise customer needs/wants with your software (compared to your smaller customers). As I mentioned above, most enterprise customers want (a) flexibility (the licenses are easy to manage from a password or security perspective), (b) discount and predictable pricing (if they commit to your solution company-wide, they don’t want you to arbitrarily increase their price), and (c) ease of administration (the agreement is easy to administer). Try to figure out if your enterprise customer has different needs/wants, as every software product’s value proposition is unique. Once you have figured out what your customer is looking for, you need to determine how to price the enterprise software license. This is not easy, but I suggest you try to ensure that you are adequately compensated for doing these deals.

3) Example. Let’s say you license your software per computer, and customers typically purchase 1-5 licenses at a time. Let’s also assume that your licenses are tied to each computer via a unique password, and they cannot be moved around. If a large customer wants to make a purchase and asks for an enterprise software agreement or license, what should you do? I recommend you look at the 3 factors above (flexibility, discount/predictability and ease of admin) and then make sure you are adequately compensated for the deal. So maybe an enterprise agreement could look like this: 50 computer licenses with open passwords (to use within their company), higher discount per copy and fixed price for 5 years for additional copies, annual usage reporting (i.e. if they exceed their 50 licenses), and in 5 years the deal dies and reverts back to fixed computer licenses. This is simply one example, but as you can see there are several levers to pull to ensure you meet their needs and they do not take advantage of you. I think the key here is that you don’t need 5 different types of enterprise agreements. Once you figure out what it should look like you can lead with that model (of course you should consider making changes at the request of an enterprise customer and don’t forget to keep improving the model as you learn more about the needs of your enterprise customer).

4) What Not to Do. I have seen some software companies simply provide a site or unlimited license as their enterprise software agreement and call it a day. Now maybe this is the right answer for your company, but I suggest you may not be adequately compensated for this type of license. The problem I have with unlimited or site licenses is, how do you define the company or site? What happens when the customer is acquired or merges with another company? You can get into some really complex drafting and what are called ‘change of control clauses‘ to avoid this issue, but I don’t think you want that level of complexity (unless the deal is really large). By the way, most large software vendors rarely license on a site or unlimited basis, and if they do it is often a term license. Here is an example of one.

So remember that when you are designing your enterprise software license agreement, you should think about the needs/wants of the customer and only then can you ensure that you are compensated for it. These enterprise agreements are really not that complex, but they do take some time to design (if you want to get them right). I really can’t do this subject justice in such a short blog post, but hopefully you got the main thoughts behind designing your enterprise software agreement (definitely think about this before you determine your company exit strategy).

Legal Disclaimer: This post is not legal advice, and is provided for general informational and educational purposes only.

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