What is a Software License Agreement? [ 5 Types + Benefits]

Being a software product company, you already have invested your time, efforts and money in developing your software.

Now, you might want to protect your software against its illegal sale or reuse after its launch in the market. That’s where you have the following questions.

  • How to protect the intellectual property of your business
  • Which license is useful to protect your software?

If yes, this blog will clear your doubts.

To protect the intellectual property of your software, you need a software license agreement.

Being a leading software company in Toronto, we have come up with a dedicated article on what is a software license agreement.

By going through this blog, you will learn:

  • The meaning of software license
  • The importance of software license
  • The five types of software license agreements
  • The things to cover in a software license
  • Advantages and disadvantages of a software license

So, let’s get started.

What is a Software License Agreement?

A software license agreement is a legal contract between you (you act as a company or business entity) and your end users (customers). Go through the following points to get a better understanding of a software license.

  • All end-user license agreements have legal guidelines on how, when, and where the software can be used.
  • A software license protects your software and provides you with legal rights against unauthorized activity on your software.
  • Licensing your software helps to keep the ownership and all the rights with you as well as earn from the software.
  • A software license allows you to safeguard your intellectual property.

So, a license agreement divides the rights of you (the company) and your end users (customers). In short, end-users are able to use the software but don’t own it.

Why Do You Need a Software License Agreement?

Before creating a software license, you might want to learn why to create a software license. Here are the reasons why a software license helps you.

If you have a software license for your software, it allows you to

  • Prevent misuse/abuse of software so your customers can’t replicate or sell it to others.
  • Terminate users if they use your software for a bad cause or purpose that might impact your business or society.
  • Saves from fraudulent or frivolous cases done by users against your software for any reason.
  • Describe disclaimers about your software regarding its working issues if it happens for the reason of maintenance or any other. So, users don’t take any legal action.

Which are the Different Types of Software Licenses?

As you might know, there are different types of software available, and so do the different software licenses. That’s why choosing the right software license agreement becomes important.

There are five types of software license agreements that are a must to know in the IT industry. Let’s start with the open-source license agreement.

  1. Open Source License Agreement

  2. The open-source software is free to use and modified as required without any restrictions or permissions. In addition, the licensed code of software applications is free to use in projects, make changes, reuse, or modify the software as per your requirements. And, upon modification of software requirements, there are no financial implications. Let’s know the benefits of an open-source license.

    2 Benefits of Open-source License Agreement

    • You get a better opportunity to grow your software as invite developers around the world.
    • Your software is durable as several developers are continuously updating and supporting it.

    Here is an example of an open-source software application.

    DSpace is a reputed open-source software to help an organization build open and free digital repositories. Since DSpace is open-source it helps organizations to use, modify, and update their code. DSpace and Fedora combined to build software platforms repositories in more than 1000 organizations in 100+ countries.
  3. Proprietary Software Licenses Agreement

  4. Proprietary licenses are a license model that gives complete control of the software application, its control, and maintenance. The proprietary software is not free to use. The publisher or creator of the software has complete rights to the software application. Most proprietary software has all the rights of software developers and publishers on the release of the software.

    This way, users won’t be able to make any changes or modifications to the software if it is bound with proprietary licenses. In addition, to use the software, the end users need to agree on the terms of the software application. Violation of the terms needed can lead to legal implications for the user of the software application.

    3 Benefits of Proprietary Software License Agreement

    • You want stability in your software application as its development is solely your responsibility.
    • You want to make your software the utmost security for your end users.
    • You want to make money from your software as users need to pay money to use your software.

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  5. Copyleft License Agreement

  6. Copyleft licenses have restrictions to follow for making any modification, use or distribution of software. In this software license, the end user needs to take permission to create, distribute, and modify the code of the software application.

    In short, it is a way to offer freedom to end users over copyright works to make changes. The software created with Copyleft needs to maintain the copyright conditions of the original work.

    Any modification or update done in the software needs to be distributed on the original license. For making improvements in the software, the users need to take permission to do so.

    Here are some benefits of a Copyleft license.

    3 Benefits of Copyleft License Agreement

    • You want to open the creative approach for your software and don’t make it bound with legal terms.
    • You want to bring advancement in your software through active users as they discover it.
    • You want to get free from the updates of your software.
  7. GNU Lesser General Public License (LGPL) Agreement

  8. Under GNU public license, developers are free to use or modify LGPL compiled software. And, developers can license their code under any type of software license agreement.

    The only important point to note here is that software built with LGPL code will be bound with the terms of original terms.

    Here is an example of an LGPL software application.

    FreeCAD is an open-source 3D design software that allows users to create informational modelling. This software is written in C++ and Python programming language. As a result, the software is durable for future requirements and its customers have the freedom to use this application for creating designs without paying any subscription fees.
  9. Permissive Licenses Agreement

  10. The permissive license is somewhat like an open-source license but has a few limitations or restrictions on the modification or distribution of the software. This helps the original creators of software to have control over their intellectual property.

    Although you can make modifications as much as you need, the changes must be acknowledged by the original license. There are two main types of permissive license agreements. Each of these permissive license agreements has its own specific terms and conditions. This license requires you to have copyright information in your software distribution.

    In addition, companies creating software applications based on the permissive license have to follow the structure of popular permissive software licenses. For example, Apache, BSD, and MIT have the finest permissive software license agreement which you can follow to create your own.

So, you know now the types of agreements. Let’s know the tips on creating a software license.

5 Tips for Creating Software License Agreements

  1. Pay attention to the details you write in the entire agreement
  2. Include all the important clauses in your software agreement
  3. Prepare a checklist and verify your software agreement against it
  4. Keep updating your software agreement over time
  5. Manage your license terms and license agreements regularly

While creating a software license agreement, you must know about the things to consider in it.

What are the Things to Include in a Software License Agreement?

Below are 12 things to consider in a software license.

  • Condition of the agreement will go into effect from
  • The time duration of the agreement
  • The terms of cancellation of the agreement
  • The permission and limitation granted
  • The copyrights given to a user
  • Guarantees of a software performance
  • Eligibility on the number of users
  • Excuslivity
  • Parties involved in the agreement
  • Disclaimer of warranties
  • Information of the upgradation and maintenance of software
  • The number of eligible devices allowed in the agreement

As you have gone through software license definition, its types, tips, and things to consider, let’s know about the advantages and limitations of an agreement.

Advantages and Limitations of Software License Agreements

Let’s now know the advantages and limitations of the software license agreement from the following table.

AdvantagesLimitations
Earn passive income through royalties by offering a software license to small businessesDistributing your license to a small business is a risk if your licensee doesn’t operate the business in an ethical way, it might affect your reputation.
Enter into foreign markets and distribute your software easily without facing any major issues.Offering more liberty in your software license might become a threat to your business’s intellectual property.
Market your software in the local areas by offering patterns to small businesses as they have better reach in small domestic markets

To make your software license legally store, you should know which clauses should be in your agreements. That’s what our next section is.

Which are the Important Clauses in Software License Agreements?

To create a strong software license agreement, you need to have the following important clauses in your agreement.

Non-exclusivity

A non-exclusivity is a term in which you as an owner of software allow the end-user to use their intellectual property. And, the mentioned intellectual property is not exclusive to a particular end user. The owner of the software has the right to sell software to other users as well for financial gain.

Non-transferability

As the owner of the software, you have the right to restrict users to whom they can transfer the license right for using the software. So, being a licensor, you ensure that you have new customers coming to purchase your software and not from your customers.

Breach of Contract

The breach of contract clause allows the software owner to describe the consequences of the end-user license agreement if it gets violated by customers. Breaching the contract might result in termination or a financial penalty.

Retention of Right Clause

This clause states that even after the execution of the agreement the right of the software remains to the owner of the software. It includes the rights of the software, software name, copyright, intellectual property, and lastly, distribution rights. This clause of the software license allows the licensor of the software to save their software from being sold, distributed, or pirated copy of the software without permission.

Modification Clause

This clause includes information on how the software should be modified if allowed. And, if allowed modification, describes the modification of the software with its scope and nature. The modification is always done in the software and not in the software license agreement.

Limitation of Liability Clause

Under this clause, the owner or developer of the software describes the extent of liabilities within the agreement. And, this clause should be accepted by the end users or customers of the software “as it is”. In addition, the clauses should be fairly written in the software license agreement.

Device Usage Clause

In this clause, you need to describe whether your customer can install your software on multiple devices or not. Depending upon your choice, you can ask developers to restrict the installation of your software other than the required devices of the end users.

Termination Clause

The termination clause of the software should be detailed and includes all the information on the termination process. In addition, the owner or developer has the right to terminate or revoke the software accessible from the end user without giving reasons. However, you need to take that such a clause does not offend the jurisdiction with unfair laws or rules and regulations.

Governing Law Clause

This clause includes the details of governing law to resolve disputes if any. In this clause, it is advisable to choose the jurisdiction of your business country.

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Do you still have questions about the software license? Check our next section which includes the answer to the most frequently asked questions on software licensing.

FAQ About Software Licensing

  1. How does software licensing work?

    Generally, software license agreements contain the legal definitions between the licensor (business owner) and licensee (users). The license agreements provide rights to end users to install, use, and modify the software.

  2. How much does a software license cost?

    The price of a software license depends on the type of software, the type of license you choose, how many services it provides, and the pricing model of your software.

  3. How do license agreements protect developers?

    A software license helps developers to protect the intellectual property through which they are earning. So, no other parties can alter or use the software code and start earning unethically. In addition, it also protects developers from unbiased or unauthenticated claims against them.

  4. How do license agreements protect users?

    A software license agreement has all the details on the rights and restrictions of using a specific software application. This way, users are able to know how they can use the software and if they can modify the software code or not. Certainly, a software license also allows users to avoid any copyright infringement and limit legal liability.

Create a License Agreement for Your Software

Software licenses are very important for your software distribution in the market. As you see, licenses protect your company from illegal implications as well as save your intellectual property rights. You have learned about the importance of software licenses, their types, their clauses and tips. Choose the right software license agreement for your software program. Create your legal agreement and release your software in the market without any fear.

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Rakesh Patel

Written by

Rakesh Patel

Rakesh Patel is the Founder and CEO of Space-O Technologies. He has 28 years of IT experience in business strategies, operations & information technology. He has expertise in various aspects of business like project planning, sales, and marketing, and has successfully defined flawless business models for the clients. A techie by mind and a writer at heart, he has authored two books – Enterprise Mobility: Strategy & Solutions and A Guide To Open311.