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23 June 2022

Who benefits from a Software Escrow Agreement?

As we continue our “Software Escrow 101” blog series, we’ve defined what software escrow means, and now we’ll delve into who benefits from a software escrow agreement.

As a recap, a Software Escrow Agreement is a simple tri-party arrangement with mutually-agreed terms between the software customer, software supplier and an escrow service provider. The software source code for a business-critical application is securely stored with the escrow service provider in case it is needed in the future – for example, in the case of bankruptcy or lack of support. If a pre-determined release condition is met, the escrow deposit is released to the software customer who can then use it to recreate and maintain their software application.

Two of the three parties in the agreement – the software buyer and software supplier – are businesses that benefit from software escrow. However, there is a third party that benefits too, and this is law firms because lawyers are important referrers of software escrow for their clients.

Read on to understand how each one benefits from escrow services.

Software Buyers (also known as licensees or SaaS subscribers)

Critical business issues for software buyers include:

  • Software buyers want to leverage the latest technology to run their business, but the application sits outside of their control. They can leverage the escrow relationship to ensure the developer lives up to its promised service levels to protect their monetary investment
  • Software buyers need to know they’ve made a safe technology decision. Is the developer a startup company? Are they in a position to be acquired by a company that may no longer support the software applications? Software escrow allows them to protect themselves from concerns they may have about the developer
  • With an escrow agreement and escrow verification in place, software buyers know they will be able to maintain access to the application source code and related materials to keep their business up and running in the event that there is an unforeseen issue with the developer
  • Software buyers also need to adhere to their company’s risk mitigation strategy. Most businesses have stringent processes to follow in order to reduce the risk of bringing new technology in-house

Software buyers need to know that their technology will be there when they need it. An escrow agreement gives them that assurance by allowing them to access the source code and other proprietary information needed to keep their technology (and business) up and running.

Software Suppliers (also known as developers, vendors, ISVs, or SaaS providers)

Critical business issues for software suppliers include:

  • Software suppliers are looking to sell their software. With the right escrow agreement, they can offer the investment protection assurance their customers need to feel comfortable making the deal
  • Software suppliers need to assure their customers that they are a safe choice. Technology escrow will reduce their customers’ risks of procuring software and, consequently, help to ensure their business continuity. Vendors can and should also escrow their most critical technology as well to mitigate risk in your supply chain
  • Software developers want to protect their intellectual property (IP). Protecting IP is of the utmost importance. Simply turning over code to customers is not an option because if the code is compromised in any way, the developer will lose their competitive advantage and miss out on new business opportunities

Technology developers want their prospects, customers and partners to have confidence in their company. Establishing sound escrow processes helps to instill trust in their solutions by letting a trusted and secure third party handle the process rather than try to do it themselves.

Law firms

Law firms help their clients reduce risk. They can reduce risk and enhance compliance for their clients through the integration of technology escrow and verification services as part of a comprehensive risk management strategy.

Law firms are referrers of software escrow services. They typically work on behalf of the software buyer to provide legal guidance on software licensing, but they can work on behalf of the developer as well. A software escrow agreement is often recommended by legal counsel as a way to protect both investments in technology and proprietary IP.

Think of software escrow as insurance, it safeguards the software buyer in case of unforeseen issues with their software supplier, whilst at the same time, the software supplier gains a means to protect their IP. From a legal point of view, software escrow provides lawyers with a valuable and cost-effective service to help their clients mitigate risk.

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