6 Tips: When Your Customer Requires You to Use Their Form Agreement

October 10, 2010

Let me frame this right for a growth company or a company seeking a venture capital investment. When you are selling to an end user under a software EULA or SAAS Contract, the customer sometimes says/insists/requires that you use their form of agreement. So what do you do in this case?

1) Negotiate, Negotiate. Don’t forget about the dynamic of negotiation. This is not the time to simply say yes and hope this reply will somehow make it easier to close the deal (it won’t). Trust me. What to negotiate? See 2-6 below. 

2) Your Model is in Your Agreement (and not theirs). If you think about it, your end user agreement contains your model (what rights the end user receives or does not receive), what restrictions they have, warranties, transfer rights, etc.) Your pricing is based on your model. If your customer wants to significantly change the terms of your offering/model, it could/should affect the price they receive. Remember these points, for price and terms are inextricably linked

3) Time is of the Essence (hopefully). Is time an issue for your customer? If time is an issue (i.e. an impending event ensues), make sure you vocalize this before you agree to use their form agreement. Using the customer’s form as a starting place will too often lengthen the sales cycle, not shorten it, even though they may tell you otherwise. Instead, start with your agreement and make the changes your customer needs to it (much more efficient). 

4) Set the Right Expectations. Make sure the customer understands they can expect extensive changes to their form agreement (every customer form agreement I witnessed looks very little like the vendor’s model), as you will need to build your model into their agreement and remove the terms that affect your pricing/model. If you don’t mention this early and get their buy in to help you work through the open issues along the way, the process of using their form will likely be very long and delay the deal unnecessarily. Oh yea, try to get a business owner/decision maker separate from their legal/purchasing department to help make decisions. You don’t necessarily want the legal or purchasing departments making the important business decisions.  

5) It is All About $. It really is all about the money. If the transaction size is too small, it may lead to a waste of your time and resources to start with the customer’s form agreement (suggest that if the transaction was $x, then it would be worth using their form agreement but as it is $x-y, it is not). However, if the transaction is large, continue to read the other tips in this post, as you may be forced to start with their form agreement. Where do you draw the line as to $? This is company specific (= your decision).

6) What are Your Goals? If you use the customer’s form agreement your goal should be to culminate with an agreement that:

  • does not pose any significant risk to your company (i.e. a risk you normally would not take)
  • is administratively efficient (i.e. you don’t need to spend a lot of time maintaining the agreement, tracking it for compliance, looking over your shoulder, etc.)
  • is consistent with your model (i.e. you can still book the revenue as you would other deals)

Keep these goals in mind or add to/change this list to fit your business model.
 
Just a few thoughts from an attorney who has negotiated hundreds of deals using the customer’s form agreement. I often discuss this topic (as one of the venture capital advisors) and others with the OpenView portfolio as part of their business growth strategies.

President and Shareholder

<strong>Jeremy Aber</strong> consults OpenView portfolio companies on legal and contract matters. Jeremy runs his own IT focused law firm, the <a href="http://www.aberlawfirm.com/">Aber Law Firm</a>, and has over 18 years experience in technology and corporate law.