“Don’t cross the streams,” says Egon in Ghostbusters (the 1984 original). “It would be bad.” Why? “Try to imagine all life as you know it stopping instantaneously and every molecule in your body exploding at the speed of light.” You could face less extreme consequences if you cross the payment streams in a contract, but it’s still a bad idea. “It would be bad,” in other words, to draft a lump sum payment for multiple products and services, with no way to tell which dollars pay for which product or service. Instead, divide your payments into as many separate streams as you can.
The Lump-Sum Problem
Imagine your deal calls for both SaaS and on-premise software. You draft a lump-sum payment: $100,000 per month for the two together. Then the on-premise software malfunctions. If you’re the customer and you don’t want to pay for that software, you have a problem. You don’t know what portion of that $100K you can refuse and what you must pay to keep using the product that still works: the SaaS. If you stop paying a portion of fees, the vendor might cut off your SaaS access, claiming breach of contract.
You’re no better off if you’re the vendor. If the customer stops paying part of the $100K fee, can you turn off the SaaS? Do you have a good claim for breach of contract? You don’t know because you don’t know how much of the payment corresponds to the SaaS. (Other contract provisions might help either party, of course, but maybe not — and we want each clause as clear as possible.)
Separate Payment Streams
As the contract-drafter, you can solve this easily. Instead of a lump-sum payment for both products, list fees for each — e.g., $75,000 per month for the SaaS and $25,000 per month for the on-premise software. Or if you really need a lump-sum, leave it in place. But add a single sentence explanation: “75% of the Fee compensates Vendor for SaaS access and 25% of the Fee compensates it for the On-Premise Software license.” Fixed.
The same goes for any offering. Separate the payment streams for each professional service, each cloud service, each on-premise software license, and each piece of hardware.
You may run into resistance. Some businesspeople prefer to avoid clarity. They like the lump-sum payment because it hides actual dollars. Listen with an open mind, but recognize that hiding the ball usually suggests something nefarious. Someone probably wants to mislead his/her own company’s accountants — to break revenue recognition rules or otherwise cook the books.
Avoid total protonic reversal. Don’t cross the streams.
© 2021 by Tech Contracts Academy, LLC. All rights reserved.
Thank you to Pixabay.com for great, free stock images!