Jorge Sagastume

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Escrow agreements are designed to meet a variety of stakeholders’ needs.  Everyone from the creative mind designing the software to the person who invests in a software company has good need for an escrow agreement.  Here are some considerations for the end users of licensed technology when deciding on an escrow agreement.

First, end users should realize that it is definitely in their best interests to get a software escrow agreement.  There are inherent risks associated with depending on software that is basically “mission critical” and not supplied in-house, but rather by an outside, third party.  Could you survive a service interruption due to a vendor bankruptcy or acquisition?  If not, you need to start your search for the right escrow agreement by considering the kinds of services you actually require.

Is your license locally installed, enterprise software?  If so, then a standard software escrow agreement should suit your needs just fine.  An escrow agreement will verify the source code, procure an important copy of the code and put a plan in place to monitor regular maintenance and other agreements.

What about cloud –based applications?  That should be handled more appropriately with a Software as a Service agreement, which creates a different level of continuation procedures, should the worst happen.  People who use cloud-based apps are particularly vulnerable to a shift in operating procedures should a vendor go bankrupt or quit for another, better opportunity.

Do you have a critical application?  You should consider having a technical inspection and possible penetration test to determine where the weaknesses of this critical program might be (particularly now as it relates to Big Data capabilities).

Have an expert walk you through the details of what escrow plan is right for the needs of your business.

dv2171024Some believe they are saving money by not taking on a software escrow.  But the reasons why many financial partners give for not taking on a software escrow agreement are actually myths that have long needed busting.  So here are a few of the most popular reasons people claim to not need a software escrow agreement – and the realities of the situation.

You can’t be expected to trust an escrow agreement company.  The truth is, a reputable escrow agreement is a third party, neutral vendor who has no bias toward either the licensee or the vendor.   The goal of a professional escrow firm is an agreement that protects and clearly defines the issues for both parties.

My source code is in jeopardy!  Nothing could be further from the truth.  In fact, an escrow agreement protects your interest in the source code because it specifies when and how source code can be released.  Just because the customer is “entitled to” the source code in some way doesn’t mean that the customer gets the source code whenever and however they want it.  There are rules governing intellectual property, and they protect the creator just as much as they protect your customers.

An escrow agreement will prevent your sale of the company.  On the contrary, any good investor who has any real knowledge of the volatility of software firms will insist on an escrow agreement before purchase or investment in a Software as a Service company or software firm.  An escrow agreement is protection for everyone.  It ensures a customer or investor that the maintenance is going to be in place and technical support is always available.

Knowing the whys and hows of your technology and how it works isn’t enough.  You need more communication about how escrow agreements really work.  Instead of relying on myths or rumors, why not find out yourself just how a software agreement can benefit your company?

ThinkstockPhotos-492151733It might seem like putting together an intellectual property or software escrow is about guarding against wrongdoing, but in reality, it is a great representation of trust for both sides.  It is just an extension of the trust that has already been going on for some time, and it enables everyone to breathe a little easier knowing the that the unexpected is accounted for.

Getting into business in the first place is an exercise in trust, if you think about it.  Customers have to trust your brand, you have to trust that the choices you are making in terms of product line, website design, software package and others are the right choices to make.  If you have ever had customized software, then you should know that what you are getting is the “object code” – the front piece that makes the software run.  The heart of the software is the “source code,” its guts, its essence, so to speak.  This code is a developer’s intellectual property, the bread and butter, as it were, of a developer’s profits.  They don’t want to share it, and understandably, they want to protect their investment.

ThinkstockPhotos-466732957When setting up a software escrow one of the most critical areas to review should be the Trigger events also known as Release Conditions.  Here are a few common events that trigger the release of the code you put into escrow.

  • The software provider files for bankruptcy. This is, of course, a dreaded event, but it’s surprisingly more common than you might think.  When your software provider or the designer of your source code files for bankruptcy, you are within your rights to ask for the release of the source code.
  • Breach of agreement. Let’s say your software provider is required to provide certain maintenance or upgrades to the source code.  If you discover this isn’t the case (say, through an audit as part of your escrow agreement), then you may want to ask for an escrow release of the source code.

Because of the uncertainty in the economy and recent Wall Street meltdown, the stability of software companies is increasingly volatile. There is great concern about software companies being able to maintain important and Mission Critical software.  If your company relies on any type of software for business processes, you may be in danger.  A Software Escrow is a useful resource to help prevent lapses in your software use and maintenance.

Several recent articles have covered the software escrow issue, including the following from PC World http://www.pcworld.com/businesscenter/article/151850/the_it_workers_wall_street_meltdown_worry_list.html, saying that “The bottom line is that you need to make sure that you can get a hold of the source code if that company goes under and ensure that it is the correct version and is valid.”

EscrowTech is the leading Software Escrow agent in the country, with offices in India as well.  Please see the related blogs and visit www.escrowtech.com for more information about Software Escrows and Technology Escrows.

Contact EscrowTech with questions about Software Escrows and Technology Escrows.

Phone: 801-852-8202    email: mail@escrowtech.com    website: www.escrowtech.com

This blog is dedicated to the explanation and exploration of Software Escrows and Source Code Escrows.  Much of this is taken from the article “Doing Software Escrows Right” published in the Computer and Internet Lawyer.  The author, Jon Christiansen, is not only a recognized computer law expert, but is also one of the founders of our company, EscrowTech International, Inc.  A full copy of the article can be found here http://escrowtech.com/article.php

Are software escrows useful?  How do you do a software escrow right?

Although software escrows have been used since the 1970’s, they are an increasingly common practice. Today, most software lawyers deal with them occasionally, if not frequently.

A software escrow protects a software licensee by ensuring that the licensee will have access to the source code in the event that the licensor goes out of business, discontinues support of the licensed software, breaches maintenance obligation, or some other release condition occurs.  Typically, the parties use a software escrow when the license is for the object code (binary form) of the software, but the licensee does not receive the source code and therefore is unable to maintain, update, or enhance it.  The licensee is dependent on the licensor for maintenance, updates, and enhancements to the software.  Simplistically, a software escrow can be described as the following:

1. The licensor delivers a copy of the source code to a software escrow agent.

2. The software escrow agent holds the source code.

3. The software escrow agent releases the source code to the licensee only if a release condition occurs.

4. The software escrow agent returns the source code to the licensor if the escrow terminates without the occurrence of a release condition.

Sometimes software escrows are referred to as technology escrows.  For clarification, software escrow are a subset of technology escrow.  Some technology escrows do not involve software or source code.  For example, technical documents, chemical formulas, prototypes, drawings, and other embodiments of intellectual property can be held in a technology escrow.

 

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Once you have selected EscrowTech as your Software Escrow agent, follow these steps:

1. Request the appropriate Agreement and forms from an EscrowTech representative by calling 801-852-8202 or email us at mail@escrowtech.com.

The following processes can be expedited by sending PDF copies via email or fax.

A. Single Beneficiary Software Escrow Agreement

a. Once you have reviewed and filled out the Agreement, print off at least one copy, sign it, and fax/email PDF a copy to the other party. Ideally, three original copies should be mailed through the loop for signatures so that all three parties can have an original.

b. The other party will then sign the originals and mail them to EscrowTech at the following address:

EscrowTech International, New Accounts, 3290 W. Mayflower Way, Lehi, UT 84043

c. Once EscrowTech receives a copy signed by both parties, an account manager will process the Agreement immediately and set up the Software Escrow to receive a Deposit. At that point, you will receive instructions and froms to make a Deposit.

B. Multiple Beneficiary Software Escrow Agreement

a. Review the Agreement and fill out the front page and Exhibit A. Also, verify that Exhibit B regarding Release Conditions is acceptable to both parties. Once you have reviewed and filled out the Agreement, print off at least one copy, sign it, and fax/email PDF a copy to EscrowTech to be fully executed and set up. Ideally, two original copies should be mailed to EscrowTech so that both parties can have an original.

b. An EscrowTech account manager will process the Agreement and contact you same day.

c. The next step is to fill out the Beneficiary Registration form. Input the Escrow No. given to you, your company information and contact person, reference your license with the client, input the product name next to its number (in a separated products Agreement), and choose the release conditions that you want to use from the sample language at the end of the form. You may need to have them approve the form before signing, but once you sign it go ahead and have your client sign it and send to EscrowTech. The other party should receive a copy of the master Agreement for their reference.

d. Once EscrowTech receives a copy signed by both parties, and account manager will process the Agreement immediately and set up the Software Escrow to receive a Deposit. At that point, you will receive instructions and forms to make a Deposit.

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