Partnering with SaaS companies; welcome to the dark side!
We have long been partner advocates in the software as a service (SaaS) enterprise space. However, rarely do SaaS partner channels impress us though.
At Skyytek we are all about contracts that create a sustainable relationship with symmetry. It is the only way things can work in the long term.
What is surprising are the number of partners that overlook basic contract language and just sign. These partners are sometimes not understanding what happens when these contracts terminate or new contract language is enforced.
Welcome to the dark side.
When you sell a upfront license fee to a customer (on-premise software) you get paid one up-front fee for that license. In SaaS, this is amortized over the lifetime of the customer in the form of a subscription. In other words, you have to front load (and pay) your sales and marketing efforts and with SaaS only benefit from the sale (profit) in year 2 or 3 or 4.
Now bearing that in mind....
The #1 question(s) you should be asking yourself is what happens if:
- The SaaS vendor terminates the contract.
- You want to terminate the contract.
To illustrate our point, lets use a contract (that is available in public domain) from WorkEtc, a maker of a SaaS product that does CRM and Project Billing. ( Sorry WorkEtc )
Most of the contract is standard boilerplate stuff. However, two paragraphs spring out:
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Modification of Agreement. We reserve the right to modify this Agreement at any time by posting an amended Agreement that is always accessible on this page and/or by giving you prior notice of a modification. You should check this Agreement periodically for modifications by scrolling to the bottom of this page for a listing of material modifications and their effective dates. IF ANY MODIFICATION IS UNACCEPTABLE TO YOU, YOUR ONLY RECOURSE IS TO TERMINATE THIS AGREEMENT. YOUR CONTINUED USE OF THIS SITE FOLLOWING OUR POSTING OF AN AMENDED AGREEMENT OR PROVIDING YOU NOTICE OF A MODIFICATION WILL CONSTITUTE BINDING ACCEPTANCE.
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Term and Termination. The term of this Agreement will begin upon our acceptance of your application and will end when terminated by either party. Either you or we may terminate this Agreement at any time, with or without cause, by giving the other party written notice of termination. Upon the termination of this Agreement for any reason, you will immediately cease use of, and remove from your site, all links to this site and all of our trademarks, trade dress, and logos, and all other materials provided by or on behalf of us to you in connection with the Program. You are eligible to earn referral fees only on sales to Referrals that occur during the term, and referral fees earned through the date of termination will remain payable only if the related orders are not cancelled or returned. We may withhold your final payment for a reasonable time to ensure that the correct amount is paid.
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The first paragraph basically states that WorkEtc can change the contract whether you like it or not and at any time. If you do not like it you can just terminate. That is good.
But, what is not good is when you combine that with the 2nd paragraph. This states that if you (or they) terminate for any reason you only get paid on the orders placed during the contract term. In other words, you do not get paid on renewals and additional users after the date of termination. In fact, the software vendor gets the full revenue now.
This creates the following issues:
- If you do not agree with a vendors contract changes, you really have no recourse otherwise you forfeit future revenue. This is similar to negotiating with the mafia with your head in a vice.
- The vendor (at some point) has a massive incentive to terminate you. It is called, "not having to pay commissions".
- You will never (repeat never) gain significant equity value (or multiple) in your company with these types of contracts. Putting it another way, you are only as good as your last deal.
- If you ever annoy the vendor; they can just terminate. In fact, they will benefit by terminating you.
- A complete contractual imbalance
Surprisingly you will find a lot of partner contracts structured like this. For affiliates that are just passing leads over; we agree on terms like this since no value is really being added. But for companies that are investing, deploying, demoing, selling and marketing in SaaS channels we categorically do not.
A more palatable approach would be to:
- Only allow economic business changes to the contract upon approval of both parties
- Allow commission payments to survive post termination of the contract; or state that the contracts can be only terminated for just cause.
Kudo's to the companies that are/have implemented better contracts for partners. You know who you are !.
Footnote: We would be very interested in hearing from anyone (with legal knowledge) on how enforceable these one-sided contracts are in the US ? This is for material for a follow-up blog. You can contact us at http://www.skyytek.com/contact
