A guest blog post from Jeremy Aber, of Aber Law, on some of the important things to consider when selling software into enterprise. As software companies grow and start to sell their products into larger organisations, many come unstuck as they don’t consider some of the issues outlined here. A short and useful primer.
Designing your enterprise license agreement is really not that difficult. However, many growing software companies don’t know where to start. So, I thought I would put together a short cheat sheet. Let’s get started.
What is an Enterprise License?
Most software companies have a licensing model based on some sort of capacity or unit of measure (example, named user, per computer, per device, # of transactions, etc.). This usually works well for SMB customers, as they are not making a large commitment to your software. However, large customers (= enterprise customers) who are spending a lot of $ are often looking for something else.
Usually they are looking for:
- Flexibility (if you have a restrictive licensing model),
- Discount (because they are buying a lot),
- Predictable future pricing (what will happen in the future), and
- Ease of administration (an efficient way to manage and pay for their licenses).
An enterprise license agreement means something different to every software company and every customer, so your job is to figure out what your specific enterprise model should look like (not necessarily what other software companies are doing).
By the way, some customers call an enterprise agreement an agreement under which they can purchase software at a discount. I am not saying they are wrong but I think that is simply a ‘pricing agreement.’
Example:
SMB License
- Metric: per computer
- Typical Quantity: 1-5 licenses at a time
- Passwords: tied to each computer via a unique password
Enterprise License
- Flexibility: 50 computer licenses with open passwords (to use within their company)
- Discount: higher discount per copy
- Predictability: fixed price for 5 years for additional copies
- Ease of Admin: annual usage reporting (i.e. if they exceed their 50 licenses) and in 5 years the deal dies and reverts back to a fixed computer license
This is simply one example, but as you can see there are several levers to pull.
What not to Do
I have seen some software companies simply provide an unlimited license as their enterprise license. Now maybe this is the right answer for your company, but I suggest you are not being adequately compensated for this license.
The problem I have with unlimited licenses is how do you define the ‘customer’? Also, what happens when the customer is acquired or purchases another large company? You can get into some really complex legal drafting to address this issue, but I don’t think you want that level of complexity (unless the deal is really large).
By the way, most large software vendors rarely license on an unlimited basis, and if they do it is usually under a term (limited duration) license.
So remember that when you design your enterprise license, you should think about the needs/wants of the customer and then come up with a license that ensures that you are being compensated correctly.
These enterprise agreements are not that complex, but they do take some time to design. I really can’t do this subject justice in such a short blog post, but hopefully you got the main thoughts behind designing your enterprise license agreement.
Legal Disclaimer: This post is not legal advice, and is provided for general informational and educational purposes only.