Escrow agreements are intended to protect licensed mission-critical technology from unforeseen circumstances. As a developer, you want to ensure that your valuable intellectual property won’t get released inadvertently. As a licensee, you rely on escrow to give you access to your technology when you need it – and that it’s complete and accurate. Either way, technology escrow is designed to give you valuable peace of mind. But what are the elements needed to ensure that the escrow agreement is effective?
The key to a successful escrow agreement is in the contract language and the ongoing administration. Be aware of the major components of the contract, and ensure that each has been attended to. Here are some of the basics.
The 6 Keys to a Successful Escrow Agreement
- Are your deposit contents complete, and update process and frequency defined? – If the deposit materials don’t include everything, you won’t be able to recreate your software application even with a release of the source code. Over 70% of all deposits sent in to Iron Mountain for analysis were determined to be incomplete and required additional input from the developer in order to be compiled. This could be a serious issue if your developer is uncooperative or no longer around. Also, make sure a specific deposit frequency is agreed to – whether it is monthly, quarterly or annually – you want to make sure the escrow materials include all of the latest updates.
- Have you chosen a verification plan? – A thorough verification of the materials provides assurance that, in the event of a deposit release, the licensee would be able to read, recreate and maintain the developer’s technology in-house – in essence, “step into the shoes” of their vendor. At Iron Mountain, we offer four levels of verification to our customers, depending on the criticality of the licensed technology and the business risks of the developer.
- What are your release conditions? Have you covered all the contingencies? – When many people think of escrow release conditions they immediately think of bankruptcy. “What would I do if my software vendor went under?” But, in reality, bankruptcy and insolvency only accounts for 20% of the releases we see. Loss of support is #1 with 30%, followed by ceasing business operations (without actually filing for bankruptcy) at 22%. Be specific and cover all possible circumstances.
- Are your release mechanisms, objection period & contrary instructions clearly stated? – This is where we get to the finer points of escrow agreements. There is a standard release process that includes an objection period, and there is also a demand release process which requires the escrow agent to deliver the source code unconditionally to the licensee, without an objection period, and if the developer contests the dispute is resolved after the release. Figure out which one you need and make sure you are covered.
- What are the rights to use following a release? – As a licensee, make sure you have the right to modify and otherwise maintain the technology upon release. This should be included in both the license agreement and the escrow agreement. Other rights you may want to specify include the right to use source code (not just object code), the right to make a backup copy, and the right to move the software to another location or computer.
- Have payment of fees and dispute resolution been negotiated? – Either party can pay for escrow, but as a licensee, you may want to pick up the check, rather than letting the developer pay. The party who pays the fees generally has more control over the terms, and most licensees want to develop the best agreement for their situation rather than just sign onto the developer’s agreement as a beneficiary.
And a final tip: Always negotiate and sign the escrow agreement together with the license agreement … and before you write the check!
We hope this clarifies some of the ins and outs of technology escrow agreements. Contact us at email@example.com if we can be of help.