A software escrow agreement or technology escrow agreement is a continuity service for business critical software,SaaS application or technology. The basic premise is that an end user (AKA: beneficiary) relies heavily upon a software or SaaS application and needs a way to continue to operate the application even if the software provider (AKA: depositor) should fail or go out of business entirely.
These agreements answer specific questions such as what is to be stored in the software escrow deposit materials, when the deposit materials can be accessed by the beneficiary, what license or permissions a beneficiary has if they receive the deposit materials and much more. The key to a strong software escrow agreement lies in the ability to customize the software escrow agreement to meet the specific needs of each situation.
Frequently Asked Questions
Any company that is relying upon software to perform a business-critical application should consider whether or not an escrow agreement would be beneficial if their software vendor were to go out of business or fail to support the application. In addition to the financial strength of the software vendor,our clients commonly consider how other factors such as the potential impact of a natural disaster, an act of War or some other unforeseen circumstance may impact their ability to support the application. In certain competitive environments the mere fact that you are software provider might be acquired by a competitor can also be a troublesome factor worth considering.
Common considerations in deciding if an escrow agreement is warranted include but are not limited to:
- Cost of the application
- Impact of lost revenue / profits
- Impact on brand
- Impact upon customer retention
- Cost / time to replace
- Identification of a suitable replacement
- Access to updated data back up
Generally speaking, the software company should deposit everything that a “reasonably skilled” software engineer would need to build and support the application as licensed in the license agreement. This typically includes a description of the build environment. build instructions, source code, documentation, third-party software tools and more so that the application can be created from the escrow deposit materials.
The best practice is to negotiate and sign the software escrow agreement at the same time that the software license agreement is negotiated and executed. Many of our clients include the escrow agreement as an exhibit to the software license agreement. Taking this approach is helpful because all parties have the opportunity to negotiate and agree upon all material escrow terms and the agreement is in place before significant dollars are spent on the application. In the event that the software project doesn’t go as planned, parties may find it difficult or impossible to agree upon escrow terms at a later date.
The United States offers the most developed laws regarding software escrow and US bankruptcy codes were adjusted in 1986 to allow escrow agents to release escrow deposits in the event of bankruptcy of the software provider. This is not necessarily true in other countries and can lead to difficulty and delays in gaining access to escrow deposit materials. Thus, the greatest majority of software escrow deposits and agreements are subject to US law and as a result the vast majority of all escrow deposits are stored in the United States, whether they are in physical or electronic format.
PRAXIS provides many different software escrow agreement templates to meet many different situations. It is often helpful to consult with your Account Executive to find the agreement template that most closely resembles your needs. The bulk of our clients then modify certain terms to more accurately fit the specific situation they have encountered. Examples of customizations that make significant difference include modifying the escrow release conditions, defining what should be placed into the escrow deposit materials, customizing the time frames related to a release and even changing the governing law for the agreement. While our escrow agreement templates are very thorough, we believe strongly that the customizations that our clients add to these standard contracts help and derive far more value from their escrow agreement with PRAXIS.
Software escrow agreements are crucial for both software vendors and licensees due to the following reasons:
For Software Vendors
Build Trust and Confidence: Offering a software escrow agreement demonstrates the vendor’s commitment to their customers’ interests. It builds trust and confidence in the vendor’s products and services, assuring customers that their investments are protected.
Competitive Advantage: In competitive markets, having a software escrow agreement can give vendors a competitive edge. It showcases their professionalism, responsible approach, and willingness to go the extra mile to ensure customer satisfaction.
Mitigate Legal Risks: A software escrow agreement helps vendors mitigate legal risks. It provides a clear framework for ownership, licensing rights, intellectual property protection, and potential disputes, reducing the likelihood of legal conflicts with customers.
Ensure Revenue Stream: By assuring customers of access to the source code in unforeseen circumstances, vendors can maintain ongoing revenue streams. Customers are more likely to invest in software solutions when they have confidence in their long-term viability.
For Licensees
Protect Investment: Licensees invest significant resources in software solutions. A software escrow agreement ensures that their investment is protected. If a vendor fails to provide updates or support, or goes out of business, the licensee can still access and maintain the software.
Business Continuity: Software escrow agreements provide a safety net for licensees, ensuring business continuity. If unexpected events occur, such as the vendor’s bankruptcy or inability to support the software, the licensee can continue using and maintaining the software with access to the escrowed source code.
Risk Mitigation: Licensees face risks associated with vendor reliability, financial stability, and product longevity. A software escrow agreement mitigates these risks by providing a contingency plan and ensuring access to the source code, reducing dependency on the vendor.
Compliance with Regulations: In certain industries, regulatory compliance requires a secure and auditable process for software procurement. A software escrow agreement demonstrates compliance with these regulations, providing transparency and accountability.
Overall, software escrow agreements benefit both vendors and licensees by fostering trust, mitigating risks, ensuring business continuity, and providing a solid foundation for long-term software usage and maintenance.
Benefits for a Software Vendor:
- Smoother negotiations
- Win more new business
- Establishes confidence by addressing the concerns of the prospective licensees
- Safe storage of source code and other materials with one company instead of scattered across multiple providers
Benefits for a Licensee
- The ability and legal right to maintain, update and enhance mission critical software
- Reduced chance of significant interruption of, or damage to, its business
- Eliminate concerns regarding the software vendor’s capabilities
- Business continuity