This article explores why it is important to have a clear definition of “Software” within the contract and how one may incorporate restrictions to software licenses effectively. Read the first article in the series to understand what a typical licensing scope language looks like.

Remember that your VC and other investors will be interested in knowing how sophisticated your product offering strategy is, how maturely you protect your core intellectual properties, and how well you can monetize your offering.

If you’re a startup founder and have a software to offer (the Vendor), protecting your software assets is crucial for long-term success. The other party, also a business (the Customer), clearly values your Software and has chosen to use it. You want to ensure they only use what they’ve paid for. Two key elements are to achieve this intent are: 1) precisely defining “Software” in your contracts, and 2) including specific license restrictions.

1. The Importance of Defining “Software”

When drafting your contract, carefully define what is being licensed. The contract should clearly outline the “Software” or “Licensed Product” in a separate definitions section. For standard licenses, the software’s name and version number might suffice. However, if your software has multiple modules or there’s potential for disputes, list all necessary elements.

Once you have the clear definition in the contract, you have achieved the following: (i) both Vendor and Customer are clear about exactly what is being licensed, and (ii) essential assets such as source code, object code, and documentations are protected from unauthorized use.

Consider the sample clauses below, one for an on-premise Software, the next for a SaaS product, and the last when you are developing a software for your Customer as per their specifications.

• Sample Clause 1:

“Software” means the computer programs provided to Customer under this Agreement, in object code form only, including all updates, upgrades, and modifications thereto, along with any related documentation, user manuals, and technical specifications.

You will notice that here it has been stated that only the ‘object code’ is provided, not the source code. It is because the Customer has the right to use the software in the way you intend it to be used, because they do not have ownership of the Software copy, but only a license to use it. This clause also talks about documentation such as a user manual that may help in allowing the Customer to understand how to use and maintain the Software copy.

• Sample clause 2:

“Software” means the cloud-based software application named (name of the proprietary product) made available by Vendor to Customer on a subscription basis via the internet, including all features, functionalities, interfaces, and data structures, as well as any updates, upgrades, and modifications thereto.

In this SaaS context, the definition focuses on the cloud-based nature of the Software and that Customer can access it on subscription basis. In this case, no copy of the Software is received. Customer is only getting the right to access and use that Software that is hosted and runs on the cloud environment of the Vendor. That is why, there is no mention of ‘object code’ or documentation generally for such offerings.

• Sample clause 3:

“Licensed Product” refers to all software to be created pursuant to this Agreement.

As you may have guessed, for software development contracts it’s often impossible to identify all the software at the time of writing the contract, therefore this broader definition has been used.