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23 June 2022

What is Software Escrow?

Software escrow has been around for forty years, yet many people in the software business are still unaware of what software escrow is, how an escrow agreement works, and who it benefits.

Software source code


Software escrow has been around for forty years, yet many people in the software business are still unaware of what software escrow is, how a escrow agreement works, and who it benefits.

You’ve got questions? Here we’ll explain software escrow services in plain language – because it really is a very simple and cost-effective way for an company to protect its investment in business-critical software applications, while at the same time providing benefits for the software supplier.


Software Escrow definition

A Software Escrow Agreement is a simple and effective tri-party arrangement with mutually-agreed terms between the software customer, software supplier, and an independent escrow service provider.


Under the Software Escrow Agreement, the supplier periodically deposits a copy of the software source code and associated materials for secure storage. (At this point we would also strongly recommend verifying the escrow deposit – this effectively means testing what is held in escrow, but you can learn more about that here.)

By securely storing the software source code and materials with a neutral third party, it ensures that the material can be accessed and released should the need arise. For example, if a pre-determined release condition is met – such as bankruptcy or lack of support – the escrow deposit is released to the software customer. They can then use the source code to recreate and maintain their business-critical software application, either with in-house resources or by engaging with another supplier.

Not to be confused with...

When most people hear the word “escrow”, they think of money held in escrow for a mortgage contract. In that situation, escrow refers to a neutral third-party holding assets or funds before they are transferred from one party in a transaction to another. So, with software escrow, essentially it is the same concept, but with software source code!


Other names for Software Escrow

You may have heard Software Escrow referred to by other names, some of these are:

Software escrow and source code escrow are the most common names.

To clarify, source code is the fundamental component of computer programs written by a computer programmer in plain text, and understandable by humans. Proprietary software vendors typically don’t share source code with customers because this is their intellectual property, essentially the crown jewels of their business.

That’s a key reason for this tri-party agreement. The source code is securely held by the escrow agent, and not shared directly with the customer. When a customer purchases or receives an operating system or application software, it is usually in the form of compiled object code, and the source code is not included.

Technology escrow is sometimes used interchangeably with software escrow as a more overarching term. This is because escrow can also be used to safeguard design documentation, formulas, algorithms, recipes, non-source code-based technology, and other proprietary materials. (Yes, we’ve protected cookie recipes and paint formulas!). Learn more about Information Escrow.

That brings us to SaaS Escrow. When Software Escrow was first imagined, there was no Software-as-a-Service; your software was housed on-premise at the customer’s physical location. Fast forward to the current day with 99% of businesses currently using one or more SaaS solutions and a projection that 85% of all software used by firms will be SaaS by 2025. To adapt, there are now multiple software escrow options for SaaS and cloud-hosted applications as well – variations support public vs private cloud, single tenancy vs multitenancy etc. Don’t worry, our cloud solution architects are on hand to point you to the best escrow agreement for your application infrastructure.


What kind of software should be placed in escrow?

A software escrow agreement is important for business-critical applications; if the software has been built specifically for the buyer or if it represents a significant financial investment; these are reasons to consider escrow. If there is concern that the software developer is new or unproven, or there’s a risk that they will be acquired, it’s another good reason to consider escrow. And from the software vendor's perspective, having software escrow in place for their application can mean that they are more attractive as an investment and they are more competitive as they are seen as less risky as a supplier.

Hopefully this blog has:

  • Helped you to understand the basics of software source code escrow.
  • Highlighted the benefits of having a software escrow agreement in place - whether you are selling or buying the software
  • Got you thinking about how software escrow could help to support your business' continuity plans

If you still have more questions, or would like to speak to our experts about which solution would be best suited to your needs, contact us today.

Interested in learning more about our Software Escrow Services?

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