The Software Reseller Agreement
By Kaiser Wahab, Esq.
A common issue facing nearly all software companies is the sales force arrangements to move the software. In terms of complexity, direct branded sales are obviously the most manageable. But that is not always the most practical or cost effective approach. Sometimes, it makes sense to have someone else to sell the software. Though it may appear too complex a proposition at the outset, a sound strategy can lead to multiplied sales. And the core component of this strategy is a sound reseller agreement. Predictability and a clear plan regarding the fundamentals, such as territories, sales channels, duration, warranties, tech support, etc. should be addressed by the agreement to avoid harming your company’s intellectual property. The following is a list of some major issues that the reseller agreement should cover.
1. Exclusivity – Whether the relationship with the reseller is exclusive or not is perhaps the most significant issue to address and is often neglected until too late. Exclusive relationships generally mean that no other reseller can resell the software on the same terms. Of course, a software company should be very wary before entering such a relationship as it prevents others from competing and/or adding revenue streams. Exclusivity may mean exclusive to a certain territory or market or end user. If exclusivity is granted, there should be mechanisms in place to terminate the agreement altogether or transform it into a non-exclusive one if certain benchmarks/milestones, such as sales volume, are not reached.
2. Products – Though it may appear obvious to you what your company sells, carefully defining the products to actually be resold is critical. One not so obvious consideration is updates and new versions of the software…are they different products that are not included under the agreement? Complimentary applications may also be considerations. A product definition may also provide for bars against resale of competing software.
3. Price - The Agreement should lay out payment terms. There is a great deal of latitude on how such terms can be setup. Unit by unit price payment can be the norm, or profit sharing arrangements can also be provided for. The reseller often asks for protection against price increases. However, bear in mind that antitrust considerations may have to be taken into account.
4. Ownership – It may appear unnecessary to state that the Intellectual Property rights in the software should remain with the developer. However, it is good practice to specify that no IP is being transferred and that, rather, the agreement is merely a license to resell. The agreement may further specify that the reseller is not authorized to make copies of the software if applicable and may impose other restrictions on use. Finally, if the reseller is actually modifying or enhancing the software, there should be a mechanism for allocating the various IP involved.
5. Territory – Many reseller agreements delineate the geographic region within which the reseller may operate (e.g., North America versus Canada). Another related restriction is the bar of sales to certain classes of end users or market niche.
6. Term – A common tug of war between the parties is the duration of the agreement. Though there re arguments for both sides to either have lengthy or a short term contract. Typically the reseller will desire predictability through a lengthy term that doesn’t provide many opportunities for termination. On the other hand the developer will want a shorter term to allow it to engage in other opportunities or quickly terminate a problematic relationship, especially an exclusive one. .
7. Termination - In conjunction with term there is termination, which can occur on or before the term duration. Another tug of war, the developer will want the widest range of termination options, such as termination at will at any time, whereas the reseller will to limit termination to specific issues. Termination also does not automatically close the door on the relationship, as there are the ongoing concerns regarding rights to sell off any outstanding inventory as well as the rights/duties regarding support of remaining customers.
8. End User License – The resold software must have an end user license agreement, or “EULA.” In some cases, the reseller will provide a EULA, especially where the software is being rebranded under the reseller’s brand name. In any event, the EULA must provide for certain essentials, not the least of which is the protection of the developer’s intellectual property. Also, the EULA may provide a site or machine specific license.
9. Maintenance and Support – The developer’s responsibilities do no not necessarily end once the reseller accepts to resell. An oft overlooked component of the reseller agreement is the support policy and responsibilities. The developer may have to provide the reseller support, or in some instances as part of the reseller arrangement, the developer will provide support directly to the end user. Decisions must be made with regard of the level of support often referred to “tiers,” such as on site service versus telephone support.