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Tuesday, June 28, 2022

Startup Constitution by Nordic Law: Terms of Use for a Tech Startups

In our line of business, where we daily assist tech startups providing various digital services, one thing we always emphasise is the importance of the terms of use. I remember one time when we met up for the first time with a startup team developing a, nowadays highly successful, SaaS-based B2B service. The team had had a pilot beta program with certain bigger companies, but unfortunately the team had run into various issues with one of their pilot customers. As the team had not yet drafted any terms of use regarding the SaaS-service they provided, the team came to us for assistance. In the end, we solved the issues that had come up during the pilot, but I can guarantee that the team in question will not forget about the significance of the terms of use straight from the get go.

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With the above introduction, we come to the actual subject of this blog post – the terms of use and their significance from a risk-minimizing point-of-view (i.e. the classic lawyer perspective – it’s all about the risks). One of the key goals for a well-functioning agreement policy is the minimizing of risks and liability – in other words, you don’t want unnecessary risks to damage your golden startup idea. For founders, it is essential to understand the importance of well-drafted agreements, especially regarding the key agreements of a digital service. Basically, if your startup is providing a digital service, the most important business agreement is the agreement controlling the use of the digital service.

That is why we will below discuss the terms of use and explain the essential do’s and don’ts in that regard.

Does My Startup Need Terms of Use?

As discussed above, terms of use go hand in hand with digital services meaning, for example, SaaS-based services. If your startup is providing a digital service, it is almost 100% sure that you also must have terms of use.

If you are in the software development scene, the terms of use should not be confused with the traditional software licence agreements. In licence agreements, the licensor grants the licensee the right to, for example, use patented technology owned by the licensor.

As most tech startups providing digital services do not sign actual user-specific agreements, the terms of use often form the only binding agreement between the startup and the user. In most cases, the applicable terms of use are standardized meaning that an individual user has not got an opportunity to negotiate about the terms of use. That being the case, to confirm that the terms of use become binding to the user, the user should be required to accept the terms of use when using the service for the first time. The acceptance of the user should be based on the user’s own activity meaning that the user should be required to tick a separate “I Accept”-field.

It is also important that the users, especially consumers, can review the current terms of use. This is often carried out with a hyperlink to the terms of use. Once the user has approved and been able to review the terms of use, your startup is good to go. You now have a new user on board!

What Is the Essential Content of the Terms of Use?

If you have now realized that your startup’s service might need terms of use, you may wonder what the terms of use normally consist of. No exhaustive list can be presented, but in general the terms of use include:

A description of the digital service and the service provider. You should in a short and sweet manner describe the digital service in question and present a summary of your startup providing the service.

The customer’s right of use and its restrictions. Normally the user’s right of use is quite restricted meaning that the user has a non-exclusive right to use the service. Once the agreement is terminated, for example by deleting the user account, the right of use ceases.

Service levels. If the service is divided into different service levels, the levels should be defined and explained. This should include descriptions of the creation of user accounts and the usability of the different levels.

Pricing. This is a no-brainer as this is the money-making part of your startup’s service – a description of the pricing model is thereby a key element of the terms of use.

IPR matters. Said section should make it clear that the service provider is the sole owner of all the IP regarding the service. Moreover, the service provider shall have a royalty-free, worldwide, perpetual, non-exclusive and transferable right and license to use the content uploaded by the users. The service provider should also guarantee that the service does not infringe on any IPR owned by third parties.

Limitation of liability. Here we come to the essentials – the terms of use should always in a clear manner define the limitation of liability of the service provider. You do not want your startup to be liable for actions of the users and that is why the terms of use normally make sure that the users are solely responsible for their actions.

Termination. Another vital area of the terms of use are the terms stating how the agreement between the service provider and the user can be terminated. Regarding apps and similar software, one common way is to state that the user can anytime terminate the agreement by deleting the user account.

Governing law and dispute resolution. It is always important for service providers to define in the terms of use the governing law to make sure that the desired legislation is applicable. Especially if your startup is providing worldwide digital services, you want to make sure that all disputes are handled in your home country based on legislation you know. As in sports, the home advantage is no myth.

Amendments. As a last essential area of the terms of use can be mentioned the terms defining how the terms of use can be amended. As the terms of use are standardized, meaning that all users follow the same rules, the common alternative is that the service provider can amend the terms of use anytime, but users must be informed of essential amendments. If the user continues to use the service after the essential amendments have gone live, the user is considered to have accepted the amended terms of use.

So, there you go. Above has been described in a nutshell the essential areas of the terms of use for a digital service. Remember, before you start a public pilot of your digital service, you should at least have a basic set of terms of use in place.

Without any terms of use, you expose your valuable startup to unnecessary risks that might become financially and emotionally expensive. To avoid such issues, you can always contact us at Nordic Law – we are here to take care of your legal needs so that you can focus purely on the business operations.

The author of this blog post is Jon Hautamäki, a partner at Nordic Law.

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