Termination for Convenience in SaaS Projects

When working with SaaS vendors, getting Termination for Convenience ("TFC") is almost impossible.

This becomes all the more difficult if you are dealing with big companies. Their rationale is primarily driven by financial prudence. Every company needs to recognize revenue which will not be possible with TFC provision. TFC gives exit rights which make a deal uncertain. Companies are unable to consider volume discounts till they know what revenue they can report at their end.  

However, depending on leverage, it is possible to negotiate provisions which even if not technically TFC, do add some protection. 

Few examples (‘Alternative Options’):

• Product swap rights: This is useful when dealing with a company with a broader and relevant portfolio of product and services. Let’s say, you realize after 6 months of the contract term that you want to discontinue using a product. In that case, if you have product swap rights built into the contract, you can apply the committed amount towards a different product which you can use.   

• Exit right: Let’s say, you have a three year contract term. While you failed to convince your supplier for TFC, you managed to get a right to exit upon completion of the first year anniversary. This gives you reasonable time to carefully assess your needs and if not well suited, you can walk out before second year starts. This may come with an obligation to notify the other party in advance. But, it is worth fighting for. 

• True down option: Even big companies allow for true down, though at anniversary. In simple terms, true down means reducing committed contract value. Usually, such an option is available for limited products and not all committed products under the contract. This provides huge relief if during the 12-month, you suddenly realize you over purchased or don’t need a few products for whatever reasons.  

• Shorter term: When you are not confident in committing for a long term, you should try to negotiate a shorter term. Example, 6 months against 1 year.    

• Trial period: sometimes, SaaS vendors allow trial periods. However, this is normally seen during acquisition of new customers. Practicality of this option gets questioned many times because the main purpose of the trial period is to test and not start using on a wider scale.

• Early termination fee: Somewhat like exit rights, but with a penalty.  Sometimes, mid to small vendors agree to exit arrangements like 'early termination fee', & 'pro-rata refund of the unused fee'. This depends a lot on the vendor’s level of motivation. Mostly, such concessions are in exchange for something crucial. For example: publicity rights.

• Acceptance period: Where SaaS involves professional services (example: implementation, customizations), it is possible to negotiate 'acceptance period'. Though this is not technically TFC, it does give peace of mind. In simple terms, the acceptance period gives us the option to discontinue if we are not satisfied with the pre-agreed performance criteria, referred to as ‘acceptance criteria’.   

Such Alternative Options may not be a direct substitute for TFC, but these do give peace of mind many times.