Companies offering enterprise software solutions need a contract that spells out how end users can work with the licensed product.
This contract is called an enterprise license agreement (ELA).
But why do SaaS (and product) companies need to draft comprehensive and enforceable enterprise license agreements?
In this article, we’ll explore the benefits and challenges of enterprise agreements. You’ll also learn how to draft a legally binding ELA for your product company.
Key takeaways
- An enterprise license agreement or enterprise software license is an authorization given by the vendor to a customer, allowing them unlimited access to their services.
- The terms of enterprise license agreements contain usage restrictions, payment structures, intellectual property rights, and conditions for termination.
- ELAs cater to large corporations with hundreds or thousands of employees, while SLAs (service license agreements) cater to individual users.
- ELAs allow corporations to keep their spending predictable within the bounds of their budget.
- Drawbacks of using ELAs include vendor lock-in, long-term expenses, and underused features.
What is an enterprise license agreement?
An enterprise license agreement (ELA) is a contract that grants customers unlimited access to all your product’s features.
This is also called an enterprise software license.
Vendors use ELAs to stratify pricing in order to provide a unique experience for high-paying customers.
ELA vs. SLA
Both ELAs and SLAs are end-user license agreements (EULA) because they specify how end users (single individuals or companies) can use an application or software.
An ELA also acts as an umbrella contract that services multiple SLAs at the same time.
However, there are some differences between SLA and ELA.
A service-level agreement (SLA) is a standalone licensing program that gives a single user access to your product.
An ELA is a licensing contract for an entire organization, usually for companies with over 500 employees.
Suppose a massive law firm wants to use PandaDoc as the primary document management solution. They’d have to sign the ELA in order to get access to enterprise-level functionality as well as discounts.
But if all the lawyers at the law firm decide to sign individual SLAs, the law firm would end up paying for individual instances of the same product.
This is expensive and difficult to manage.
What does an ELA contain?
Every ELA you create for your product should include the following.
Terms of the ELA
This outlines terms like “authorized end user” and “provider” in order to remove any form of ambiguity.
It also spells out the conditions and stipulations of the agreement.
Official documentation
This includes the legal names of the company’s representatives as well as other documents of incorporation.
Duration
The ELA could be a one-time subscription or a perpetual license that auto-renews after a specific period.
The agreement should also contain important dates for deployment, reporting, renewal, or termination.
Minimum entry requirements
Customers need to reach a minimum payment or user count threshold to qualify for an ELA.
For example, the ELA could apply to organizations with 500+ employees with a minimum budget of $200k.
Permissions and restrictions
You can specify parameters on usage based on location or frequency.
For instance, the ELA can restrict access to only end users within the EU or MENA zone.
This is important for compliance and industry regulations.
Intellectual property
This prevents customers from making unauthorized changes to the software, including copying, modifying, or translating the product’s source code.
Other components include dispute resolution mechanisms, conditions for termination, legal jurisdiction, pricing, and operating hours for customer support.
Why get an enterprise license agreement?
ELAs allow organizations to pay for products used across the company.
This agreement is common for Microsoft products as well as services such as AWS and VMware.
Here are ways customers can benefit from using an ELA.
Reduce expenses
ELAs come with the best pricing discounts attached to bulk purchases — which will cost you less than buying a single-user software license for every employee.
Besides, the higher the number of users, the larger the discount.
Manage licenses easier
When you buy an enterprise agreement, the standard option is a 3-year license.
In some cases, the vendor might provide license management options to pay for the entire three years or for yearly renewals.
This means that your managers can streamline processes and increase overall productivity since they won’t need to worry about service disruptions while the license is active.
Keep spending predictable
Since your organization is locked in with one product, you can onboard new employees to the software without having to purchase additional licenses with every new hire.
This makes it easier to create a spending budget for every period of time.
Maintain flexible growth
ELAs provide organizations with the predictability and flexibility to scale operations smoothly.
With your budget locked in and licenses bagged, you can increase your workload and expand your workforce.
Just make sure you don’t go beyond the limits of the ELA.
Potential challenges of using ELAs
Some customers worry about signing ELAs because they present a unique set of challenges.
Let’s explore the potential drawbacks of enterprise software license management.
Vendor lock-in
Switching from one product to another often requires a massive overhaul of internal business operations.
But if you are locked in with one software provider, this process becomes even more strenuous and disruptive.
Say a software company wants to ditch AWS for Microsoft Azure halfway into a 3-year ELA.
This would require changing workflows and personnel, as well as re-addressing the entire information architecture.
Long-term expenses
ELAs are perfect for massive corporations that can afford to pay top dollar for apps and services.
But for mid-sized companies and startups, paying for enterprise licenses can be a financial challenge.
And with the “SaaSification” of everything, the expenses can stack up beyond the company’s budget.
Unused features
ELAs give you unlimited access to features.
But in reality, your employees may not use half of them.
As a result, you end up paying a premium for features you don’t even need.
This is one of the reasons why organizations are reluctant to go into ELAs.
Licensing and data center restrictions
Knowing who is allowed to use the application and where they can access the product is vital to signing an ELA.
Unlimited use does not give you the right to do whatever you want with the app or service.
Some enterprise agreements cannot be used outside the specified jurisdiction due to political, ethical, or commercial reasons.
These data center restrictions are common for companies specializing in user data handling and financial services. Sanctions and local laws can also restrict usage in specific locations.
Moreover, some software vendors require customers to renegotiate the contract after acquisitions, partitions, or mergers.
How to draft enforceable and comprehensive ELAs
Here is a step-by-step guide to help you draft a comprehensive ELA.
- Outline and define the terms of procurement. You can use a template to save time.
- Mention tracking, usage restrictions, and intellectual property rights.
- Include expected deployment dates and signature fields.
- Establish conflict resolution mechanisms and conditions for mutual or enforced termination.
- Negotiate terms with the customer. Make sure you align with them in terms of timelines, payment structure, and pricing.
- Finalize the terms and submit the final draft for compliance review.
- Sign the ELA and send it to the customer.
- Save a copy.
Create and sign legally binding ELAs with PandaDoc
ELAs help software vendors to outline the rules and conditions for customers using their software products.
This agreement often caters to corporations and large companies with massive workforces. However, startups and mid-sized companies can use it to boost organizational efficiency.
To side-step the challenges of creating binding ELAs, you need to adopt the following best practices.
- Establish a mutually agreed upon system for tracking consumption. This could be a monitoring application or automation connected to the product’s API.
- Schedule regular usage audits to ensure customers are complying with the ELA terms.
- Adopt additional cybersecurity and data protection measures to safeguard sensitive customer information from unauthorized access.
- Hire a legal team or internal compliance lawyer to review all ELAs to ensure they comply with industry, local, and internal regulations.
- Ask customers for feedback in order to understand persistent pain points and possible areas of improvement.
- Pick a pricing sweet spot to stay competitive while guaranteeing maximum profit on every sale.
PandaDoc is a contract management solution that allows you to create legally binding licensing agreements with customers.
With our library of templates, you can reduce the time needed for drafting, editing, and redlining contracts.
Companies can also use PandaDoc to handle ELAs throughout the contract lifecycle, from deployment to termination.
The available payment integrations make it possible to renew contracts instantly.
To start creating a custom enterprise license agreement, start a free trial or book a demo.
Disclaimer
PandaDoc is not a law firm, or a substitute for an attorney or law firm. This page is not intended to and does not provide legal advice. Should you have legal questions on the validity of e-signatures or digital signatures and the enforceability thereof, please consult with an attorney or law firm. Use of PandaDoc services are governed by our Terms of Use and Privacy Policy.
