SaaS contracts and round of funding: pay attention to the transfer clause

When a SaaS company prepares for a round of funding, restructuring or takeover, they generally focus on the financial, legal, and operational aspects related to the transaction. But a contractual detail can complicate everything: the transfer clause provided for in your SaaS contracts.

This clause, which regulates the possibility of transferring the contract to a third party, seems trivial. In fact, if it's poorly written, it can give your customers blocking power over your strategic operations.

Why does the transfer clause exist?

A contract is concluded between two parties who know and trust each other. It is therefore logical that one cannot freely transfer its obligations without supervision.

In a personalized service contract (for example, a tailor-made consulting contract), the transfer clause protects the client: he wants to be sure to continue working with the same person or the same team.

But a SaaS contract is different: you do not provide an individualized service, but access to a shared solution. In this context, allowing your customers to block a transfer makes no sense.

The risk of a poorly written clause

Many SaaS companiesdon't pay attention to this clause when drafting or negotiating their contracts. However, the consequences can be serious.

Let's say that your SaaS contracts all include a strict ban on transfers without the customer's prior agreement. Theoretically, each client could oppose a round of funding, takeover or internal reorganization operation.

In practice, no SaaS company will seek such an agreement, but you are exposed to:

• a risk of termination for failure to comply,
• a claim for damages for a contractual breach,
• a weakening of your position during due diligence.

An investor or purchaser could consider this clause to be a real threat to the legal security of your client portfolio.

How to write the clause appropriately?

To avoid any blockage, the transfer clause must be adapted to the SaaS model and the realities of growth transactions. Here are the best practices:

• Expressly authorize the transfer in the event of a capital or intra-group transaction: thus, a round of funding or an internal reorganization cannot be contested by the client.
• Provide simple information afterwards: you inform the customer once the operation has been completed. This is logical, because these transactions are confidential until they are finalized.
• Negotiate a limited right of cancellation: if the customer insists, you can provide that he has a right of cancellation only if the transaction creates a real risk for him (transfer to a direct competitor, transfer to a country presenting risks, objective decrease in service quality).

With this type of clause, you avoid turning your customers into arbiters of your strategic transactions, while taking into account their legitimate concerns.

The challenge for your strategic operations

A poorly written transfer clause may seem anecdotal, but it becomes a real subject during a fundraising or takeover. Investors are alert to anything that could threaten the continuity of your recurring income.

If each customer has a theoretical right of veto, the valuation of your company may be affected. Conversely, a clear and balanced clause reassures your financial partners and simplifies due diligence.

The transfer clause in your SaaS contracts is not just a legal detail. Poorly written, it can weaken your strategic operations, or even give your customers an implicit right of veto.

The right approach is to anticipate: authorise transfers related to capital transactions, provide for information after the fact, and, if necessary, grant a right of cancellation limited to cases where a real risk exists for the client.