What You Need to Know About Software Licensing Agreements

14 July 2021

If your company plans to create and distribute any type of software, you’ll need a software licensing agreement to accompany the product. Entirely new to this? Here’s what you need to know. 

Software License Agreement

What is a software licensing agreement? 

A software licensing agreement is a written document that grants permission to your customers to use your product, subject to specific terms and conditions. Customers using your software are governed by the licence and do not own the software itself. A licensing agreement might include how the software can be used, how many times it can be installed, and if it can be modified, redistributed, or copied in any way. 

Why do you need a software licensing agreement? 

A well-written and legally binding software licensing agreement protects your company in several ways. With an agreement in place, your company can: 

  • Limit Liability
    Protecting your company from potential lawsuits is a priority. Limiting liability means your company doesn’t need to spend time and resources on legal issues.
  • Disclaim Warranties
    Including a disclaimer in your licensing agreement means that customers agree to use the software as-is. This protects your company from issues arising from events such as server downtime, data loss and software bugs.
  • Revoke Licences
    In the case of a breach, your software licensing agreement allows you to terminate access to the software at any time. Typically this clause enables your company to revoke or suspend licences, often for any reason.
  • Prevent Abuse
    If you don’t want to find a bootleg copy of your software being sold in obscure corners of the internet or installed on hundreds of computers for free, your agreement must define terms of use. This will save you from possible income loss. 
  • License, not Sell
    Software agreements generally grant a licence for use. By licensing instead of selling your product, you ultimately retain greater control and profit opportunity. 

With the basics covered, let’s take a closer look at what your software licensing agreement should include. 

Master fee

Your fee structure may vary depending on the type of software your company produces. Your software licensing agreement should determine whether the software is subject to a one-time fee, a subscription-based model – annually or otherwise, and the timing of any renewal fees. If you have other software-associated fees such as installation, hosting, or technical support, these should also be included in this section. 

Parties involved 

You’ll need to include details on the individuals or companies entering into the agreement, including personal information such as full name, and contact information such as a mailing address. Depending on where your company is headquartered, where your servers are located, and how globally distributed your customer base is, you may be subject to a range of personal information and data collection obligations. A legal professional can help you meet these obligations in your licensing agreement.  

Intellectual property

 Your software has undoubtedly resulted from thousands of hours of research and development, extensive testing, and ongoing improvement. To prevent a user from deconstructing your software and developing their own technology based on your time and expertise, a solid licensing agreement needs to clearly define your company’s Intellectual Property rights, including any trademarked or copyrighted components. 


If your software is based on a subscription model, your licensing agreement should clarify how renewals will be processed. This might include whether renewals are an opt-in or automatic renewal process, whether your software will store payment information ongoing, and how much notice your company will provide to customers before renewal is processed or fees increase. 

Term and termination 

There are two components to this section. Your termination clause defines your company’s right to terminate user access at any time, including subject to any breach of the licensing agreement. You should consider determining how users will be notified and what steps must be taken to complete the account termination – such as uninstalling software, destroying physical access tokens, or simply revoking account credential access. 

Related to the renewals clause, an agreement also needs to define the term of software access. This may be lifetime access or a limited period subject to renewal and renewed agreement with the terms and conditions of licensing at that point in time. 

Free trials 

If your company plans to offer a free trial of your software, this should be limited in your software licensing agreement. Include the term or length of the trial, whether the paid subscription automatically commences at the end of the trial, and whether the trial can be cancelled within the free period to avoid charges. 


Including a warranty, clause is essential for risk mitigation. A disclaimer of warranty means that your customer – the software user – accepts the risk of using the software as-is from the point of download or installation. Should the user experience any negative consequences from events such as server downtime, software bugs, data loss, or software vulnerabilities, your company is protected. 

Limitation of liability 

Similar to the disclaimer of warranty, limitation of liability simply protects your company from frivolous or ungrounded lawsuits. By defining the limits of company liability, the user must agree to take on a level of risk acceptance when using your software. This can potentially save your company a great deal of time and money should an issue arise in the future. 

Data sovereignty 

An ever-complicated and constantly evolving issue, data sovereignty is growing in importance. Your software licensing agreement needs to clearly define where data is housed and by which legal regulations it is bound. 

Software Support

Your licensing agreement should cover what type of support is offered to users, how it can be accessed, and what the costs are to use the support service. If there are specific conditions that apply to support, these should also be defined in this clause. 


Developing and distributing software can be a lucrative and rewarding process, but serious legal considerations must be taken. Ensuring your company has a watertight software licensing agreement in place for all software products is an absolute must. It’s strongly recommended that you engage a legal professional to draft and finalize your software licensing agreement. Should an agreement not be drawn up correctly, the consequences could be catastrophic for a business.