Software License: Definition, Terms, How it Works

What Is a Software License?

A software license is a legally binding agreement made between the owner or developer of a software program and an individual user or an organization, outlining how they can use and distribute the product. In addition to setting general terms on how software can be used or distributed, a software license also prevents and protects the developer from infringement of copyright law. Typically, the software license addresses things like:

• If the user can view the underlying source code
• If the user can copy, alter, or redistribute the program
• Where the program can be installed and how frequently

Why Software Licensing Is Important

Before any proprietary software can be installed, it has to be legally licensed. Otherwise, it would be considered a breach of copyright law to use the software. For businesses acting as users, being aware of software licensing is particularly important because you don't want to unnecessarily pay for licenses that you aren't using. While acquiring too many can be a waste of a company's resources, having too few can leave the company vulnerable to a costly potential lawsuit. Additionally, software license agreements can make managing the company's software way easier, so it's important that you find the right one.

As a software developer, software license agreements protect the investment of time, energy, and resources, ensuring that you will be able to make a profit from your hard work. Some of the other motivations for obtaining a software license agreement are because it:

• Prevents customers from abusing your software. Without getting a signed licensing agreement, there's nothing stopping your customer from attempting to copy your software for their own benefit. Usually, customers that try to copy software do it so that they can install it on multiple computers, saving them money, but they could also try to sell it for a profit. Either way, this could cost you potential income.
• Allows you to license the software without selling it. You can let customers pay for a license of your software while maintaining all rights to it, allowing you to license it out with restrictions placed on its use. This essentially gives you more control over how your software is both used and distributed and gives you the chance to make more money over time.
• Gives you the chance to disclaim warranties. Customers have certain expectations any time they purchase a product, and your software is no different. By incorporating a disclaimer of warranties in your license agreement, you can require the user to accept the software as available or as-is, putting the risk on them.
• Limits your liability. Limiting your liability is extremely important because it helps protect your company against potential lawsuits.
• Allows you to freely revoke licenses. Including this section of the agreement gives you the freedom to revoke or suspend licenses at any time, and for any reason, helping you keep complete control over the software.

Image via Unsplash by @zanilic

How Software Licensing Works

You retain complete ownership of the product and control its use as a software license holder. Additionally, you dictate the terms of distribution, select the types of businesses and organizations that use the software, and continue to sell it to as many customers and clients as you wish. A software license agreement is a legally binding contract between the software’s developer and end-users. These contracts are enforceable as long as they are clear and mutually agreed upon at the time of payment or when the user begins using the software.

What are Different Types of Software Licenses?

Most businesses keep software licenses in a text document and contractually restrict a user’s claims against a developer. Additionally, software licenses may contain restrictions on various end-user rights, such as installation, warranties , and liability. You can find most software licenses on the developer’s site or within the interface, although some developers may provide the license in other ways.

The majority of software and their agreements fall under two broad categories of licenses:

• Type 1. Proprietary software licenses: Proprietary software licenses limit a users’ legal ability to change software code. A significant segment of software licenses falls under this category, as most commercial software licenses restrict an end-user’s access and define acceptable use terms. They also provide the most protection for developers.
• Type 2. Free and open-source software (FOSS) licenses: FOSS licenses are contracts that permit end-users to share, modify, use, and reuse a software product’s source code. FOSS licenses may place some limits on modifications and distribution, but they generally vest users with considerable authority over their use.

Developers can also donate their software’s rights to the public domain. In these cases, the software remains unrestricted and unprotected against copyright infringement while becoming freely available to the public.

Private software not covered by a license is still subject to copyright restrictions. It’s essential to understand the distinctions between ownership and licensing since both types confer rights on users but not ownership. Carefully consider your legal options when determining what is suitable for you.

What Is Included in a Software Licensing Agreement?

Software license agreements can look different depending on the developer and the use, but most of these documents contain at least these four sections:

General Information

This section provides information regarding the type of agreement being established, when the agreement goes into effect, and how long it will be active for.

Involved Parties

In this section, you provide details about the people or businesses that are entering into the agreement. Aside from clarifying whether each party is an individual or a company, you will need to provide key details, such as each party's:

• Full name.
• Contact information.
• Address.

Terms

The terms of the agreement should be set out in this section, including important information regarding:

• The price of the license and whether it is a one-time flat fee or requires annual fees.
• Access to the coding.
• Whether the license is a site license, meaning it can be used on multiple computers as long as they are at one location.
• Support, maintenance, and refunds that are or aren't offered.

Additional Details

Any terms that are specific to your software or situation and aren't found in other sections of the agreement should be listed here. This section is also where you can place signatures, dates, and a note about any notarization requirements.

Additional Clauses Often Found in Software License Agreements

Aside from the four main sections, there are some clauses that provide important protection for your business, such as:

• Governing law : This is where you establish which state or city will have jurisdiction over any potential legal disputes.
• Termination: Setting guidelines for the event of an agreement termination allows you to establish that you are legally within your rights to revoke the license for any reason and at any time. You can also detail the steps that will need to be taken, such as uninstalling or destroying the software.
• Limits of liability: Including this clause protects you from potential lawsuits from the customer by clearly stating that they are accepting the software as-is and disclaiming any implied warranties regarding the software and its usage.
• Device usage: The need for this section really depends on how you license the software. You could use this opportunity to outline whether the customer is restricted to installing the software on one computer, or whether this is a site license that applies to multiple computers at one location.
• Breach of contract : When entering into a contract, it's always wise to have a clause that states that not adhering to the terms will result in a breach of contract. This gives you the opportunity to set up clear consequences so that you can protect and regain control of your software if the need arises.
• Modification: Unless you are allowing users to freely alter your software, which is inadvisable, you should include a clause that states what defines modification for this specific agreement and any guidelines that you have about how your software can be modified. Most customers understand and expect the need for this clause because you, as the developer, should have control over any changes made to the software and be able to profit from them.
• Rights: To prevent someone from purchasing a license and then stealing key components of your software for their own product, you need to clarify that the rights to the software are your property even after the agreement has been executed, including the name, software copyright, intellectual property rights, and distribution rights.
• Non-transferability: This clause is essential if you want to restrict the license from being transferred to another business or person. Non-transferability clauses are common because transferred licenses prevent you from making money from new customers, but also because you won't have an enforceable agreement with the new party once it is transferred. In most cases, software licenses are only transferrable when the original computer is no longer in use.
• Non-exclusivity: If you're hoping to license your software to other businesses so that you can increase your profits, you should include a clause that clearly states that your software isn't exclusive to that customer.

Legally binding agreements, such as a software license agreement, are essential regardless of what kind of business you're in or the kind of transaction taking place. To keep your product and your profits protected, it's imperative that you clearly lay out your rights and expectations before you allow users to install and use your software.

What Are Software Licenses Used For?

Companies use software licenses to protect their legal rights and meet requirements and provisions of local laws. They ensure that there are no misunderstandings between the licensor and licensee. The license terms specify the extent to which an application vendor can access the user’s personally identifiable information.

These agreements safeguard and prevent the misuse of personal information such as credit card information, geolocation data, or healthcare information. You can also use software licenses when allowing other companies to relabel or remarket a component of your software products under their name.