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The Basics of Software License Agreements

If you create software for customers, then you need to consider creating a software license agreement to help protect you and your business. There are many reasons to have one in place, so if you do not yet have one, it is time to start understanding its ins and outs.

What Is a Software License Agreement?

To put it simply, a software license agreement is an agreement between your company and your customers for use of the software you have the rights to. It allows your customers to use your software and details exactly how they can use it. Within the software license agreement, it will detail where customers can install it as well as how and how often it can be installed. Additionally, it should answer questions your customers may have about their ability to copy it, modify it, or redistribute it. The software's price and licensing fees may also be detailed in this agreement. A software license agreement is something you want to have in place to prevent or protect you from infringement of copyright law.


Why You Need a Software License Agreement

As a software developer, you have likely spent a lot of time and money developing the software you are wishing to license. You are probably also counting on it to bring you some income as a result. If you think about all of that effort, you will want to make sure that there is a way to protect it. That is where a software license agreement comes into play. These are the five main reasons you should have a software license agreement:

  • It prevents abuses of your software – If you fail to have one of these agreements signed by one of your customers, there is nothing stopping them from trying to replicate it or copy it for their own benefit. This does not mean that they will sell it, but it would be a possibility. More than likely, you will have customers who will copy it for their own business and get it on all of their computers for the cost of one copy. This can cost you a lot of money in profits and it is not fair to you as the developer. If you want to protect your business in this manner, you need to make sure you have a software license agreement in place.
  • It allows you to license it and not sell it – This is a big distinction. When you allow users to purchase a license of your software, you still retain all rights to it. This allows you to license it to others and also allows you to place restrictions on its use. You can keep more control of the usage as well as the distribution of it in this way. Instead of selling the software and the rights, you will be keeping them so you can continue to license it to others and make more money in the long run.
  • It allows you to disclaim warranties – No matter what you do, a customer who installs your software will have expectations that cannot be met all the time. This can be something such as a guarantee of no software bugs, no downtime, or other such expectations. You can include terms in your software license agreement that will include a disclaimer of warranties which will require the user to accept it as is or as available. This puts the risk back into their hands. This disclaimer can come in handy if the software servers go down and your users cannot use it for some time as it will prevent them from trying to blame you for their lost data.
  • It can limit your liability – This is a very important component because if you do not limit your liability as a software developer, then you could potentially be exposing yourself to lawsuits. These lawsuits not only take up your valuable time, but they also can create some financial issues for you. The last thing you want is for one of your customers to attempt to sue you because the device they tried to install it on crashed after installation. By limiting your liability, you are essentially preventing them from suing you because they agreed to your terms before they gained access to even download it. However, make sure the liability clause is fair to both parties.
  • It can allow you to terminate use at any time with no problems – There should be a portion of the agreement that states that you can revoke licenses at any time. This also gives you the freedom to do so for any reason. Not only can you terminate them, but you can also suspend them if you need to. This is part of being able to maintain complete control over the software at all times. If you do have to revoke a license and your customers try to start a dispute, all you will need to do is refer them to this clause.

What Software License Agreements Cover

There are four main sections of software license agreements and each one covers different information that is key to the execution of the agreement, as follows:

  • General information – In this section, you will find information about when the agreement will go into effect, how long the terms of the agreement will be active for, and the type of agreement. While this is very general information, it is important because it sets the tone for the entire agreement.
  • Parties involved – This section is important because it defines who the parties are that are entering into the agreement. It will not only detail your company as the one offering the license, but will also include the details of the person or company that is purchasing the license. You will need to enter in their full name as well as their address and other contact information. You will also need to define whether it is an individual or a company. This information will need to be provided for both parties.
  • Terms of the agreement – In this section, you will find all of the terms of the agreement. This includes the price to be paid for the license, which you can define as a flat fee or a flat fee with yearly maintenance fees. You will also include information about whether you will be including the code along with the license and if it is a site license. A site license is another option that will allow your customer to use the software on more than one computer but only at one location. This section will also include some information about maintenance, support, or refunds that will or will not be offered by your company through the agreement.
  • Fine details – This section is the one that you will use to detail any specifics that are not covered by the other sections of the software license agreement. These terms tend to be more specific to your situation instead of broadly expected terms. Also in this section will be the location for signatures and dates. You can also add in the requirement to have it notarized if you wish to do so.

Important Clauses of Software License Agreements

The four sections detailed above only feature a brief overview of what you can expect from any standard software license agreement. There are some key clauses that you will want to include to make sure that you are well protected no matter what may happen in the future. While it is difficult to predict everything that can happen, you can take the time to ensure that you protect yourself as much as possible by including these essential clauses.

  • Non-exclusivity – If you want to license your software to other companies, you will want to make sure that the software license agreement does not leave out a clause that details that the rights are non-exclusive. This will allow you to license your software to other parties so you can continue to make a profit from it.
  • Non-transferability – This is a clause that you will want to include if you are not allowing the license to be transferred to another party. You do not want the license to transfer to another person or business because that will essentially take a customer away from you. That is the main reason why you will want this clause. Additionally, you do not want to end up in the situation where you do not have an enforceable agreement with the party the software is transferred to.
  • Rights – You should detail that the rights to the software will remain your property even after execution of the agreement. This includes the actual software, the name, the copyright, the distribution rights, and even the intellectual property rights. You do not want someone purchasing a license to then steal components of it from you for their own financial gain. This is a very important inclusion because it essentially protects your product for you.
  • Modification – If you are not allowing the software to be modified in any way on the back end, you should make that clear with a clause that says so and also details what the term "modification" means for this agreement. Unless this is something you want to happen, it will likely only cause issues for you later on. Your best bet is to limit any modifications, if not completely restrict them, in all cases. Since this is a license agreement, this is not usually something that is expected. Your customers will likely understand that the software is created the way it is and will remain that way.
  • Breach of contract – You need to include a clause that states that if any terms are not followed then it will result in a breach of contract where you can revoke the license as a result. You do not want a breach of contract to occur, but in the case that it does, you should have this in place so you can take back control of your software and better protect it.
  • Device usage – Depending on how you license the software, you will want to include whether the licensee is allowed to use the software on one single computer or on multiple computers in the same location, such as the business location. This prevents companies from taking advantage of your software and trying to get more for the price they paid. Not all companies will try to find a sneaky way around, but if they do, you should make sure that you have this detailed so there is no question.
  • Limitation of liability – We previously discussed how important limitation of liability was for your agreement and company. To enjoy the benefits of this, however, you will need to include this clause in your agreement. This will detail the fact that the licensee will be accepting the software as is, will not be able to sue for damages, and that you make no warranty for the software and the usage.
  • Terms of termination – In case you ever do need to terminate the agreement, this clause will detail the actions that must be taken by the licensee. This is generally something like destroying the software on site or uninstalling it from the device. You should also include that you can terminate or revoke the software at any time and for any reason without any repercussions.
  • Governing law – This section will detail the governing law for settling any disputes. You will want to make sure that this is set for your state and jurisdiction. You do not want to wind up in court in another state because the user lives there. Make sure you get this in writing so any court proceedings will only take place in your area.

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