Legal Checklist for Selling Your SaaS Company

Laila Archer, CIPP/US

Privacy Law Attorney

January 18, 2025

Selling your SaaS company represents the culmination of years of hard work, late nights, and strategic decisions. Whether you are entertaining acquisition offers or actively pursuing an exit, understanding the legal landscape can mean the difference between a smooth transaction that maximizes value and a prolonged process that exposes problems and reduces your purchase price. This comprehensive checklist will help you prepare for the legal aspects of selling your software company.

Corporate Organization and Governance

Buyers will scrutinize your corporate structure and governance meticulously. Start by ensuring your corporate records are complete and accurate. This includes articles of incorporation, bylaws, amendments, stock ledgers, option grants, board consents and minutes, and shareholder agreements.

Many early-stage companies let corporate formalities slide, leading to missing board minutes, unsigned stock certificates, or unclear cap tables. Address these issues before entering discussions with potential acquirers. Reconstruct missing documentation, obtain ratification of past actions through board and shareholder consents, and ensure your cap table accurately reflects all equity ownership, including employee options and warrants.

Verify that all equity issuances complied with securities laws. Early stock sales to founders, friends, and family often occur without proper exemptions or filings. While these issues can often be resolved, discovering them during buyer due diligence creates leverage problems and valuation concerns.

Intellectual Property Rights

For a SaaS company, intellectual property represents your most valuable asset. Buyers will conduct exhaustive IP due diligence to confirm you own what you claim to own and can operate without infringing third-party rights.

Verify IP Ownership

Confirm that your company actually owns all the IP in your product. This requires reviewing and documenting assignment agreements from all founders, employees, contractors, and consultants who contributed to product development. Every person who wrote code, designed interfaces, or created content for your product should have signed an agreement assigning their work to the company.

Early-stage companies frequently overlook obtaining assignments from founders before incorporation or from contractors who helped build the initial product. If you discover missing assignments, obtain them now. If individuals refuse to sign or cannot be located, consult counsel about remediation options, which may include copyright registrations, implied licenses, or other strategies.

Protect Trade Secrets

Document your trade secret protection measures. Buyers want assurance that your proprietary information is actually protected. This includes confidentiality agreements with employees and contractors, non-disclosure agreements with partners and customers, restricted access to sensitive systems and information, and physical and digital security measures.

Review Third-Party IP

Identify and document all third-party code, libraries, APIs, and other IP incorporated in your product. Buyers will want to understand your dependencies and ensure you have proper licenses for all components. Pay particular attention to open source software, as certain licenses can create obligations or restrictions that concern buyers.

Create a comprehensive inventory of all third-party software, including license types, any obligations under those licenses, and your compliance with license terms. If you have used open source code under GPL or other copyleft licenses, be prepared to explain how you have complied with license requirements and ensure no license violations exist.

Customer and Vendor Contracts

Your customer agreements form the foundation of your recurring revenue and represent a key asset in any acquisition. Organize all customer contracts and ensure they are properly executed with clear terms.

Standard Terms of Service

Review your standard terms of service or customer agreement to ensure they include provisions buyers expect: IP ownership and licensing terms, limitation of liability, indemnification provisions, termination rights, data privacy and security commitments, and warranty disclaimers.

If your terms have evolved over time, identify which customers are under which terms and whether any legacy terms create unusual obligations or risks.

Non-Standard Agreements

Document any customers with non-standard terms, particularly large enterprise customers with negotiated agreements. Buyers will want to understand unusual provisions like enhanced SLAs, exclusive rights, unlimited liability, guaranteed pricing, or termination for convenience clauses.

Change of Control Provisions

Review customer and vendor contracts for change of control provisions that may be triggered by an acquisition. Some agreements allow customers to terminate upon change of control or require consent before assignment. Identify these provisions early so you can address them in the transaction structure or obtain necessary consents.

Key Vendor Relationships

Document relationships with critical vendors, including cloud infrastructure providers, payment processors, marketing platforms, and other essential services. Ensure you have copies of all vendor agreements and understand termination rights, pricing terms, and change of control implications.

Employment and Compensation

Your team represents a key asset that buyers will evaluate carefully, along with compensation structures and potential liabilities.

Employment Agreements and Offer Letters

Organize employment agreements, offer letters, and contractor agreements for all team members. Ensure agreements include IP assignment provisions, confidentiality obligations, and non-competition provisions appropriate to your jurisdiction.

Equity Compensation

Document your equity compensation plan, including the plan document itself, option grants to employees and advisors, exercise records, and outstanding options with vesting schedules. Ensure option grants were properly approved by the board and priced appropriately based on fair market value at grant date. Improperly priced options can create tax problems and accounting issues.

Employee Benefits and Policies

Compile employee handbooks, policies, and benefit plans. Document any outstanding bonus obligations, commission arrangements, or deferred compensation. If you have made verbal commitments to employees about retention or bonuses, document these clearly to avoid surprises during or after the transaction.

Employment Issues

Disclose any pending or threatened employment claims, including discrimination complaints, wage and hour disputes, or wrongful termination allegations. Address these proactively rather than allowing buyers to discover them during due diligence.

Regulatory Compliance and Privacy

SaaS companies handle customer data, making privacy and security compliance essential areas of buyer due diligence.

Privacy Compliance

Document your privacy program, including privacy policies, data processing agreements with customers, vendor data processing agreements, privacy impact assessments, and compliance with applicable privacy laws like CCPA, GDPR, or sector-specific requirements.

If you handle health information, ensure HIPAA compliance documentation is comprehensive. If you serve European customers, verify GDPR compliance and document your legal basis for processing. Review data transfer mechanisms if you transfer personal data internationally.

Security Program

Document your information security program, including security policies and procedures, access controls and authentication mechanisms, encryption standards, backup and disaster recovery plans, incident response procedures, and security testing results.

If you have completed SOC 2 audits, penetration testing, or other security assessments, compile these reports. If you have experienced security incidents or data breaches, document the incidents, your response, and remediation measures implemented.

Industry-Specific Regulations

If you operate in a regulated industry, document compliance with applicable requirements. Healthcare companies should document HIPAA compliance, financial services companies should address GLBA and other financial regulations, and companies serving government customers should document FedRAMP or other government security certifications.

Financial and Tax Matters

While your financial advisors and accountants will lead financial due diligence, certain legal aspects require attention.

Financial Statements and Records

Ensure financial statements are accurate and prepared in accordance with GAAP. If you have revenue recognition issues, particularly around multi-year contracts or professional services, document your accounting treatment and ensure it complies with ASC 606 revenue recognition standards.

Tax Compliance

Verify that all required tax returns have been filed and taxes paid. This includes federal and state income taxes, payroll taxes, sales and use taxes, and property taxes. If you have sales tax nexus issues common with SaaS companies operating in multiple states, address these before they surface in due diligence.

Outstanding Liabilities

Document all outstanding liabilities, including debt obligations, deferred revenue, accrued expenses, contingent liabilities, and potential tax obligations. Buyers will want to understand the complete liability picture.

Litigation and Disputes

Disclose any pending or threatened litigation, arbitrations, or disputes. This includes customer disputes, vendor disagreements, employment claims, IP infringement allegations, and regulatory investigations.

Even if you believe claims are meritless, disclose them. Buyers will discover them eventually, and early disclosure demonstrates transparency and allows for proper risk assessment and pricing.

Preparing Your Data Room

Once you have organized the materials described above, create a well-organized virtual data room for buyer due diligence. Structure your data room logically with folders for corporate organization, intellectual property, contracts, employment, compliance, financial information, and litigation.

Include an index describing the contents of each folder and highlighting any items requiring special attention. The more organized and complete your data room, the more confidence buyers will have in your business and management team.

Timing Considerations

Address these legal matters well before entering serious acquisition discussions. Attempting to clean up legal issues while negotiating with buyers creates time pressure, reduces your negotiating leverage, and may lead buyers to question other aspects of your business.

Ideally, conduct this legal audit 6-12 months before you plan to pursue an exit, giving you time to address issues without pressure. Even if you are not planning an exit, maintaining clean legal records represents good governance and positions you to respond quickly if an unexpected acquisition opportunity arises.

Working with Legal Counsel

While this checklist provides a roadmap, work with experienced M&A counsel throughout the process. An attorney familiar with SaaS transactions can identify issues specific to your business, advise on remediation strategies, prepare you for buyer concerns, negotiate transaction terms that protect your interests, and ensure the transaction closes smoothly.

The investment in proper legal preparation pays dividends through smoother transactions, stronger negotiating positions, and maximized valuations when you finally sell your company.