Licensing software: a comprehensive guide to software licence agreements

1. What is a software licence agreement?

Software licence agreement are legally binding contracts that set out the terms and conditions under which a user is granted the right to use a particular software product. A software licence agreement will typically define the scope of software usage, the rights of each party, along with any obligations and terms that provide legal protection for each party.

It also includes any restrictions on the user of the software, typically including restrictions on the user's ability to reverse engineer copy, alter or redistribute the program.

2. What is a traditional software licence model?

A traditional software licence model is software that is installed or accessed via the customer’s own system (as opposed to from the supplier’s systems (or via a cloud-based platform – for more information about software as a service, check out this comprehensive guide).

For traditional software licence models, a software licence agreement is an appropriate template to govern use and restrictions of the software licence.

3. Traditional software licence model vs software as a service (SaaS) licence models

What’s the difference between a traditional software licence agreement and a SaaS agreement?

Access and installation

With SaaS agreements, the use of software that can be accessed by users over the internet, known as software as a service or SaaS. So instead of needing to install and maintain the software yourself, users will usually access it through a web browser or an app. The user will pay for a monthly or annual subscription to the service and the SaaS provider hosts and manages the software on their own servers.

With software licence agreements, the software that’s accessed via the customer’s own system. So, the software licence will be purchased by the user and then they’ll download the software either via a CD or from the vendor’s website, and install it directly on their own computer.

Data

With traditional software licences, the user has control over the data that’s stored and processed by the software as the software is installed locally and the data remains on their own servers or devices.

With the SaaS licence model, the customer’s data is stored on servers maintained by the service provider.

Pricing models

SaaS agreements often follow a subscription-based pricing model. Businesses pay a recurring fee, usually billed monthly or annually, based on their usage and the features included in their subscription. This model offers flexibility as businesses can scale their usage up or down as needed. For more information about SaaS pricing models, check out this blog.

In software licence agreements, customers generally pay an upfront fee to purchase the software licences for the required number of users. Additionally, there may be ongoing fees for support or maintenance services. This pricing model provides a one-time investment for the licences or providers may also charge on a subscription basis.

Updates and maintenance

In traditional software licence agreements, the customer is typically responsible for managing updates and maintenance. They need to proactively install updates and patches provided by the software vendor to ensure the software remains up-to-date and secure.

In SaaS agreements, the responsibility for software updates and maintenance rests with the SaaS provider. They handle regular updates, bug fixes, and system maintenance, ensuring that users have access to the latest features and improvements without any additional effort or cost.

Scalability and flexibility

Traditional software licence agreements may require purchasing additional licences or negotiating upgrades to accommodate business growth or changing requirements. Scaling up may involve additional costs and the process can be more complex compared to the flexibility offered by SaaS agreements. However, with the traditional software licence model, the customer is generally seen to have more control over the software and their data than with SaaS.

SaaS agreements are becoming increasingly popular as they offer scalability and flexibility to businesses. As the user base grows or business needs change, it's relatively easy to scale up or down the subscription plan. SaaS agreements allow businesses to add or remove users, adjust the level of service, and access additional features as required.

For more information about the differences between software licence agreements and contracts for SaaS, check out this blog.

4. What are the benefits of traditional a software licence model?

Ownership

With traditional a software licence model, businesses have greater control and ownership over the software. If the software licence is perpetual (i.e. lasts a lifetime), then once the software is purchased and installed locally, it becomes a permanent asset for the business. This provides a sense of ownership and control over the software's usage, customisation and data management.

Customer’s control over data

With the software installed locally, businesses have direct control over their data. They can implement their own data security measures, decide where and how the data is stored and be responsible for their own compliance with data protection regulations. Depending on the type of business, a higher level of control is desired by customers who deal with particularly sensitive data or strict data privacy policies.

Offline access

Traditional software licences allow for offline access to the software. Once installed on a local device or server, users can typically access and use the software without an internet connection. This can be beneficial in situations where reliable internet access is limited or when sensitive data needs to be processed securely offline.

Customisation and integration

Traditional software licences often offer more opportunities for customisation and integration. Businesses can modify the software to suit their specific needs, tailor user interfaces and integrate it with other software or systems already in use. Although this is becoming more common with SaaS, it will usually come at a higher on-going fee.

One-time cost

With traditional software licences, businesses typically make a one-time upfront payment for the licences, or licences that are payable on a long-term basis, such as 3 years. This can be advantageous for businesses with predictable budgets, as they can avoid recurring subscription fees. It allows for a clear cost structure and long-term ownership of the software without ongoing frequent payments.

Long-term stability

Traditional software licences provide a sense of stability and continuity. Once the software is installed and operational, businesses can continue using it without interruptions or dependency on ongoing service provider availability. This can be particularly valuable for businesses that rely heavily on specific software functionalities or have complex workflows built around the software.

5. What are important clauses to include in your software licence agreement

Software licence agreements are crucial for protecting a software provider’s intellectual property, establishing clear expectations and establishing who has control over the customer’s data. By including the below clauses in your own software licence agreement, you can protect your rights, ensure the customer retains control over its own data and safeguard your business from legal risks:

Scope of licence

Fundamental to any software licence contract, the scope of the licence sets the boundaries within which the software can be accessed and used by the customer. It should specify how the software can be used, the amount of users and the purpose that the software should be used for. This ensures that the customer uses the software as it was intended by the software provider.

Intellectual property rights

One of the most important clauses in a software licence agreement is the intellectual property clause. This clause clearly outlines the ownership of the software and any associated intellectual property rights. It specifies that the software is owned by the software provider and is licensed to the customer, subject to the terms and conditions of the software licence agreement. By clarifying ownership, you ensure that your software remains protected and that users understand their rights and restrictions concerning the software's use and distribution.

Restrictions

In addition to the scope of the licence being granted, the software licence agreement should also specify any restrictions that the customer must ensure it does not do. Unless the purpose of the software is to be altered, the software licence agreement will typically prevent the customer from reverse engineering, modifying or redistributing the software.

Data privacy and security

Customers are becoming increasingly concerned about the storage and security of their data. To address these concerns, it is crucial to include a clause that clarifies who will own the customer’s data and if it will be stored anywhere other than the customer's own devices. If either of the parties processes the other party’s personal data, then a separate data protection agreement should be entered into to cover any processing activities.

Confidentiality and non-disclosure

To ensure your confidential information is kept confidential, a confidentiality clause should be included in a software licence agreement. This clause enforces confidentiality obligations regarding proprietary or confidential information that is shared in connection with the licence. Including this clause will ensure that both parties maintain the confidentiality of trade secrets, proprietary algorithms and any other confidential information that is disclosed.

If you want to learn more about the must-have clauses to include in your software licence agreements, our legal experts delve deeper into these essential provisions in this blog.

6. Does software licence agreements typically include support and maintenance services?

Yes, software licence agreements can include provisions for support and maintenance services, depending on the services that the vendor is willing to offer to customers. This is an important aspect that should be clearly documented in the agreement as it directly impacts the customer's use of the software and the level of upkeep they may be required to carry out.

What is software support?

Software support is an ongoing service aimed at maintaining the software, addressing queries and resolving issues with the software such as bugs. The software support and maintenance section of the software licence agreement may include details on the availability of support, such as whether the software provider will offer support during business hours or provide 24/7 support. It may also specify the expected response time for addressing customer enquiries. Additionally, the agreement may outline the resolution time or escalation process for more complex issues that require further attention.

By including provisions for support and maintenance services in the licence agreement, you can establish clear expectations and responsibilities for each party, reducing misunderstandings and disputes later on. Customers can have peace of mind knowing that they have access to assistance when needed, while the software provider can ensure the smooth operation of their software and address any potential issues promptly. It is important for both parties to review and understand the support and maintenance terms to ensure they will be agreeing to a manageable level of service throughout the period that support will be provided for.

8. Conclusion

In conclusion, software licence agreements play a crucial role in establishing the terms and conditions under which software is licensed to users. They serve as an important legal framework that facilitates the use of software from a vendor to its customer.

When creating your own software licence agreement, it is important to include a detailed scope of the licence, clarify intellectual property rights and the licence of the software, usage guidelines and restrictions, data privacy and confidentiality terms. By including the clauses that are essential to safeguarding your business interest, both software providers and customers can protect their rights, establish clear expectations and mitigate legal risks when it comes to traditional software licensing.

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