Enterprise License Agreements: How to Design Yours!

Short answer: an enterprise license agreement gives a large customer three things your standard paper does not: flexibility, predictable discounted pricing, and ease of administration. Design it around those, and price it so you are paid for the value.

This is an issue near and dear to me, as I have spent a large part of my career drafting and negotiating enterprise license agreements. Many growing software companies are trying to figure out how to design their enterprise license agreement, so some thoughts on it would be helpful.

What Is Enterprise Licensing?

Most software companies license their software based on some metric (user, computer, device, division, revenue, and so on). That often works for small and medium customers, but not for large enterprise customers. An enterprise customer wants something more: flexibility, discounted and predictable pricing, and ease of administration, before it will commit to a large, company-wide license. An enterprise license is really a copyright license scoped to fit a big organization, so the term can mean different things to different vendors and customers, and you need to define what it means to your company and your large customers.

Factors to Consider in Designing Your Enterprise License Agreement.

The first thing to think about is what your enterprise customer needs and wants with your software, compared to your smaller customers. Most enterprise customers want:

• flexibility (the licenses are easy to manage from a password or security perspective);
• discounted and predictable pricing (if they commit to your solution company-wide, they do not want you to arbitrarily increase their price); and
• ease of administration (the agreement is easy to administer).

Figure out whether your enterprise customer has other needs, because every product’s value proposition is unique. Once you know what they want, you have to price it.

How to Price It.

Pricing is where most enterprise deals are won or lost. A few approaches that protect your value:

• Tiered or banded. Price by ranges (employees, revenue, capacity) so growth inside a band is simple and growth past it triggers a step-up.
• Committed volume with a true-up. The customer commits to a baseline and reconciles overage annually, giving them predictability and you upside as they grow.
• Multi-year with a capped escalator. Predictable increases (for example, a fixed annual cap) instead of open-ended repricing.

What NOT to Do.

I have seen software companies just hand over a site or unlimited license and call it a day. Maybe that is right for your company, but with an unlimited or site license you are usually not being adequately compensated for the value you are giving away. The problem is how you define the “company” or “site.” What happens when the customer is acquired or merges with another company? You can draft complex change-of-control and assignment clauses to handle it, but you probably do not want that complexity unless the deal is very large. Designing an enterprise license that captures the right value is exactly what we do when structuring software licenses for vendors, and it starts with getting the license metric right.

Frequently Asked Questions.

What makes an enterprise license different from a standard one? It is built around flexibility, predictable discounted pricing, and easy administration for a large, company-wide commitment, rather than a simple per-user or per-device metric.

Should I just offer an unlimited or site license? Usually no. Unlimited and site licenses tend to undercompensate you and create hard “what counts as the company or site” problems, especially after a merger or acquisition.

How do I keep pricing predictable without giving away upside? Use tiers or bands, a committed baseline with an annual true-up, or a multi-year term with a capped escalator. Each gives the customer predictability while you still get paid as they grow.

Enterprise licensing is one form of software licensing structure. For the foundational comparison of EULA vs SaaS subscription structures, see SaaS Agreement vs. Software EULA: Which Template Do I Need?

Disclaimer:

This post is for informational and educational purposes only, and is not legal advice. You should hire an attorney if you need legal advice, which should be provided only after review of all relevant facts and applicable law.