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11 April 2024

Negotiating a Software Escrow Agreement


When your business has made the decision to implement a Software Escrow Agreement, the next step involves negotiating the terms, including the escrow clauses. The process of finalising the agreement and negotiating its terms can be a complex. It is crucial to ensure that the Software Escrow Agreement effectively meets your business needs, requirements, and continuity plans.

In this blog, we discuss the key terms and escrow clauses that need to be carefully considered and reviewed.

1 | Deposits

You need to consider software, as well as the types of code, items from a third party, and any relevant documentation. One of the main issues surrounding deposits is deciding on the frequency with which they will be made. To avoid any disputes, all parties must consider how frequently changes are likely to be made to the material in escrow and, from this, decide on a suitable frequency that ensures an up-to-date version of the material is always available.

All parties should agree on the following:

  • What will be deposited? Will the vendor be depositing just the source code or any other associated materials?
  • Frequency of deposits? Will these be made daily, weekly, monthly, or yearly?
  • How will the material be used on release? Will the licensee maintain the software in-house?

It’s important to discuss the rights, responsibilities, and representations of all the parties involved, including the depositor(s), beneficiary (you), and escrow agent. The period of coverage and termination, which is typically a one-year period with automatic renewal.

2 | Fees

You should establish who will pay which fees upfront. You can discuss any fee queries with your Escode Account Manager or appointed legal representative prior to or during the negotiation of the escrow agreement.

All parties should agree on the following:

  • Who will pay for escrow protection? Will the cost be split 50/50 between the vendor and licensee?
  • Who will pay for the ongoing costs of escrow protection? Will one party pay the first-year annual fee and the other party pay ongoing fees, or vice versa.

3 | Release Event

An Escrow Agreement provides you with assurance that, on the occurrence of a pre-agreed release event, you will be able to access the latest source code deposit and associated materials of your software application. In the negotiation stages, all parties should agree on the release event procedures in advance so that if the situation occurs, the licensee can quickly enact its business continuity plans.

The escrow agreement will include an outline of the release event procedure and details of the application process for all parties’ reference.

All parties should agree on the following:

  • What is considered a ‘release event’? Escode’s standard agreement includes release events in relation to bankruptcy, administration, and breach of maintenance, but we can expand or limit this.
  • How will you protect software IPR (Intellectual Property Rights)? The licensee must be able to continue business operations in a release event.
  • Time to rectify issues? Agree on a timeframe that the technology partner/software vendor will have to rectify the issue in advance to avoid any conflict further down the line.

By incorporating these software escrow clauses into the agreement, all parties can establish clear procedures for release events, protecting intellectual property rights, and ensuring timely issue resolution.

4 | Software Escrow Verification

In addition to an Escrow Agreement, we always recommend additional levels of verification. Although a Software Escrow Agreement ensures that code will be released if and when a release condition occurs, you have no assurance that the software will be complete, usable, or even readable. That’s where Escrow Verification services come into play.

Software Escrow Verification assures that should the software application ever need to be recreated from the original source code, the knowledge and guidance to do so will be available.

Licensees are assured that they will be able to take over the maintenance and service of their source code if necessary. Software vendors can reassure their customers by demonstrating their commitment to best practice.

All parties should agree on the following:

  • What level of verification is required? Escode offers verification services for on-premise and cloud applications, and while the exercises can seem daunting, our years of knowledge and experience make this process simple.
  • Who is paying for the verification?
  • How many verifications can the licensee request per year? 

Our team of verification consultants can work with you to determine the level of verification required.

Negotiating the terms and clauses of a Software Escrow Agreement involves careful consideration of deposits (material and frequency), fees, release events, and verification. This ensures the development of escrow agreements that meet your business needs, requirements, and business continuity plans.

Our Software Escrow Agreements and Verification Services for on-premise and cloud applications, enable businesses to prepare for, respond to, and recover from disruption – so whatever your business challenges, we’re here to help you handle them.   

Interested in learning more about our Software Escrow Services?

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