What Growing Businesses Should Know About Software Agreements

On a daily basis, almost every company uses software of some type. From simple programs like Microsoft Office to business-essential CRM programs like Salesforce, knowing how to read a software agreement is important. Different terms allow varying degrees of flexibility, which is especially important for growing companies who plan on adding employees in the future, while the software agreement is still in force.

When reviewing a software agreement, businesses will want to pay careful attention to how the business is authorized to use the software. Are you buying the software, is the manufacturer giving you a license, or a number of seats? Is the license limited, are the seats limited, and what happens if I need more licenses or seats? These are some of the questions the software agreement should answer, and as a business owner, you’ll want to make sure those answers align with your company’s goals.

If there’s a possibility of exceeding those limits, you’ll want to make sure the software agreement provides for how much it will cost to add additional licenses or seats. Many software manufacturers will offer discounts for increased usage. If it’s likely you’ll be adding users in the future, you may be able to leverage a better price before executing the agreement.

A term common to almost all software agreements is the end user license agreement, or “EULA”. EULAs outline what the customer’s usage rights are. Customer usage is usually limited to internal business purposes, and generally includes the right to run, download, or reproduce the software.

However, users need to be careful that they do not go over any user limits when reproducing. If a company purchases 10 copies of software, they may be subject to additional fees if they copy it onto 11 computers, even if only 10 people use it at any one time. A good EULA will clearly outline specific user limits and restrictions on reproduction.

In other software agreements, you will see the term “enterprise license.” Enterprise licenses give the customer the right to make as many copies as it needs. Both the vendor and the customer should review these contracts carefully. The contract should also identify any permissions or restrictions of use by subsidiaries, parent companies and other affiliates.

A third type of EULA is referred to as a “client-server” arrangement. This is a situation where the software sits on a single server and users access and use it from their own computers, without making new copies. These agreements should specifically outline how many concurrent users are allowed. For example, the software may be accessible by every employee in a company, but use may be restricted to only 20 users at one time.

A variant of the client-server arrangement arises when usage is restricted to a number of designated “seats.” These type of EULAs call for users to be specifically designated. For example, if a client-server agreement states that the contract is for 10 seats, 10 specific users will be designated, and only those specific users will be permitted to use the software.

Software agreements can present unique challenges to the small business owner because they include both tech jargon and legalese. Software agreements are often vital for business-essential activities, and you’ll want to know exactly what you’re signing up for. Just like any other capital acquisition, you’ll want to make sure your software purchase matches your company’s needs.

For more information on software agreements, check out The Tech Contracts Handbook, by David W. Tollen, an easy to read book that covers the basics of a variety of different technology contracts.

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