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Issues to consider when negotiating an IT services agreement include:
- Is the engagement for the provision of services, or for delivery of specific deliverables? Or a combination of both?
- Is it a one-off engagement, or likely to be the first of a series of engagements ?
- Is the services provider being paid on a time-spent basis (‘time & materials’/’T&M’), or on delivery of pre-agreed deliverables (‘fixed price’)?
- Is payment for the deliverables subject to user acceptance testing (UAT)? If so, who is responsible for testing, what tests/criteria are used, and is the services provider excused any minor failures? What happens if the deliverable fails UAT?
- Is delivery staged, using pre-agreed milestones? If so, will the milestones trigger interim UATs and/or part payments? What happens in the service provider fails to meet a milestone?
- What rights does the client have if the service provider fails to deliver the deliverable (and/or pass the UAT) by the agreed date? If there is a late delivery payment, is this the client’s only remedy?
- Does the client own the intellectual property rights in the deliverables or other output of the services? If the client is granted a licence instead of ownership, what rights does the service provider retain? What licensing arrangement apply for third party software?
- Is any third party software required in connection with the project? Who is responsible for procuring this software? Is it licensed directly to the customer, or subject to a sub-licence granted by the service provider?
- Are the arrangements between the service provider and its consultants/contractors consistent with the customer acquiring ownership of the IP? Should the customer look for additional comfort regarding assignment of the IP directly from the supplier’s consultants/contractors? If the service provider is a limited company, does the client need separate agreements with the individuals who are actually creating the deliverables?
- What warranties are being provided by the service provider for the deliverables, and for how long?
- If the service provider is an individual contracting via a personal service company, are the arrangements affected by the off-payroll working rules (IR35)?
- Is the engagement ‘fixed’, or can the client terminate the engagement for convenience? If so, how much notice must the client give, and what are the client’s obligations on termination? What if any termination rights does the service provider have?
- Is the service provider restricted from providing services to the customer’s competitors?
- Are there restrictions on the customer hiring/poaching the supplier’s staff?
Tags: fixed price, IPRs, IR35, IT services, personal service company, PSC, T&M, UAT, user acceptance testing
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An IP assignment is a transfer by the owner (assignor) of its rights, title and interests in specified intellectual property (IP) to the receiver (assignee). Under English law an assignment of intellectual property rights must be in writing to be effective.
Issues to consider when negotiating an IP assignment include:
- On what date is (or was) the assignment effective?
- Have the intellectual property rights (IPRs) that are the subject of the assignment been adequately identified/described, including any registrations or applications?
- Does the assignee already have a copy of the software or other the material in which the IPRs subsist?
- If the assignee is paying for the IPRs, when and how will payment be made? What happens if payment is late?
- What warranties is the assignor giving in relation to the IPRs?
- What indemnities is the assignor giving?
- If copyright is being assigned, has the assignor (or, if different, the original creator of the copyright) waived their moral rights?
- If the assignor is a company, do the individual(s) who created the IPRs need to be parties to the assignment?
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Following initial discussions, you may want to put the key terms down on paper before you start the time consuming and/or costly negotiation of the full contract. This document is known as Heads of Terms, or often just ‘Heads’. Also known as Letter of Intent/LOI or Memorandum of Understanding/MOU.
Issues to consider include:
- Are any of the provisions in the Heads of Terms are intended to be legally binding, eg confidentiality or non-solicitation? Is this clear from the document? Equally, is it clear that the other provisions are intended not to be legally binding?
- Will the supplier be starting work after the Heads of Terms have been signed, but before the full contract is concluded? If so, what happens if the parties fail to agree a full contract, but the supplier has carried out work and/or incurred expenditure?
- Are the parties free to negotiate with third parties once the Heads of Terms have been signed? If so, how long does the restriction continue? What happens if a party does start talking to someone else?
- If a party decides to withdraw without good reason after the Heads of Terms have been signed, are they responsible for some or all of the other party’s wasted legal/other costs? If so, how much? And what constitutes a good reason?
Tags: Heads, heads of terms, legally binding, LOI, MOU
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Key issues to consider when negotiating a Shareholders’ Agreement include:
Funding
- How will the business be funded?
- If shares are being issued, how are they being paid for (cash, IP, other assets etc)? Will all shareholders have the same type of shares, i.e. the same voting rights and entitlements to dividends and capital?
- If any of the funding is being provided by way of a loan, on what terms is the loan being made and repaid?
Business
- Will the shareholders be agreeing a business plan, either for the first year or two, or on an ongoing, annual basis?
- Is the business being set up for the long term, or with a view to an exit as soon as possible?
Profits
- What proportion of profits will be distributed as dividends, rather than reinvested in the business?
- Will all dividends be distributed to shareholders equally, or will profits be allocated by the board to shareholders based on performance, effort etc?
Employees
- What employees will the company be hiring, and on what terms?
- Will full-time directors be entitled to be paid for their work, over and above their entitlement to any profits?
- Will the company use shares to motivate and retain key employees, whether by way of a share option plan or otherwise?
Directors
- How often will board meetings be held? How many directors need to attend the meeting for the meeting to be quorate, so that decisions can be made?
- Will all board decisions be made by way of a simple majority, or will a different majority (two-thirds, three-quarters etc.) be required for key board decisions?
- Will the right of individual directors to make bank transfers, sign contracts, employ staff, purchase assets etc. be limited?
- How can directors be removed, and/or additional directors appointed?
Decision making
- What types of decisions will the directors need to refer to the shareholders?
- For decisions that require shareholder approval, what percentage of the shareholders is required?
- Will minority shareholders be given any special protections?
Sale of shares
- What happens if a shareholder wants to sell their shares? Should all the other shareholders have first dibs?
- How are the shares valued? By an independent accountant, by reference to a pre-agreed formula, or using some other method?
- If a shareholder dies or is permanently incapacitated, what happens to their shares?
Drag along/tag along
- If the majority (or other minimum percentage) of the shareholders want to sell their shares to a third party, will they be entitled to force (‘drag along’) the remaining shareholders to sell to that third party as well?
- If the majority (or other minimum percentage) of the shareholders propose to sell their shares to a third party, will the remaining shareholders have the right participate (‘tag along’) in the sale to the third party?
Employee shareholders
- If a shareholder is also an employee, do they have to sell their shares if they resign? What if they are fired?
- If a leaving employee shareholder has to sell their shares, does the company have the right to purchase the shares in priority to the other shareholders?
Non-compete restrictions
- What non-compete and/or other restrictions will apply to a shareholder who leaves?
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Key issues to consider when drafting, reviewing or negotiating an NDA include:
- Should the NDA be mutual or one-way?
- Has the information to be treated as confidential been adequately identified and defined? Does it include information disclosed verbally?
- What information is not confidential, e.g. because it is already in the possession of the receiving party, or the receiving party acquires it independently from the disclosing party?
- Does the NDA need to extend to information disclosed before the NDA is signed?
- Has the purpose for which the receiving party may use the confidential information been adequately identified and defined?
- With whom may the receiving party share the confidential information, e.g. contractors, group companies, professional advisers etc.? Is the receiving party directly responsible for any non-permitted disclosure by those third parties?
- What security measures does the receiving party need to adopt for the confidential information?
- What is the duration of the NDA? Can it be terminated? If the NDA is terminated, how long do the confidentiality obligations themselves continue?
- What are the receiving party’s obligations in terms of returning/destroying confidential information? Is the receiving party able to comply with an obligation to ‘delete all electronic copies’? Is the receiving party entitled to retain a copy of the confidential information, whether for legal/regulatory reasons or otherwise?
Tags: confidentiality agreement, NDA, non disclosure agreement
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Before committing to a purchase and full deployment, a prospective customer may require a trial or ‘proof of concept’ (POC) of the supplier’s technology. Although a trial will be limited in both duration and scope, many of the implementation, licensing, data processing and liability issues that apply to full deployment will also apply to a trial.
Issues to consider when negotiating a trial/POC agreement include:
- How long will the trial continue? Does the customer have an option to extend the trial?
- What is the scope of the trial? Is the trial limited to a testing or staging environment, or is the customer entitled to deploy the technology in a live, production environment?
- Will the customer provide the supplier with formal feedback during or following the trial? Will the supplier be entitled to use data from the trial and/or customer feedback for marketing purposes?
- Is the customer paying for the trial? Can the customer deduct the trial payment against the charges for a purchase of a full deployment?
- If the trial involves the use of any supplier hardware or other equipment, who is responsible for any loss or damage during the trial?
- Does the trial involve the processing of the customer’s personal data, and require data processing terms to be agreed?
Tags: DPA, POC, trial agreement
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Issues to consider when negotiating a SaaS (Software as a Service) agreement include:
- How is the customer on-boarded/integrated? What remote or physical access to the customer’s IT systems does the supplier need?
- Are there any other customer dependencies? What happens if the supplier fails to meet the installation or go-live date?
- Is there a minimum term during which the customer is unable terminate? After the end of the minimum term, does the term renew for a further fixed period, or can it then be terminated at any time? Can the customer terminate during the minimum term/renewal term, but subject to an early termination payment?
- Will the supplier be accessing, storing or otherwise processing any of the customer’s personal data? If so, have the parties agreed data processing terms?
- What IT and other security measures will the supplier maintain in relation to the customer’s data?
- What service levels apply to the services, particularly regarding availability and fault fixing times? Is the customer entitled to service credits and/or to terminate the agreement if service levels are not met?
Tags: saas, service levels, software as a service
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Licence agreements are key assets for suppliers of on-premise software, and a key part of a potential investor’s or purchaser’s due diligence.
Issues to consider include:
- For how long can the customer use the software? If not indefinitely, what are the parties required to do at the end of the licence term?
- For what purpose is the customer entitled to use the software? Are there any circumstances in which they are entitled to modify or improve it? If so, who owns the IP in any modifications/improvements?
- Is the customer entitled to allow any third parties to use the software, eg the customer’s group companies, contractors or agents? Do the restrictions on use equally apply to these third parties? Is the customer directly responsible to you for the way the software is used by the third parties?
- Who is responsible for the installation of the software? What happens if the agreed go-live date is delayed?
- Is the customer entitled to new versions of the software, and if so on what terms? Can the customer be required to upgrade to a new version?
- What rights does the customer have to reject/return the software, whether for convenience or otherwise?
- What warranties are provided, and how do they continue? Are the contractual warranties instead of or in addition to warranties implied by law? What rights does the customer have in case of breach?
- What happens if a third party alleges that the software is infringing their IP?
- If the customer fails to pay the licence fee, as well as suing for non-payment is the customer’s right to use the software suspended?
- If the software incorporates or is supplied with third party software, is the third party software sub-licensed to the customer or does the customer require their own licence from the third party? What licensing terms or EULA apply to the third party software?
- Does the customer have any rights to access and use the source code of the software, whether as part of an escrow arrangement or otherwise?
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