Escrow Associates

Protect Your Intellectual Property with Proper Due Diligence

Intellectual Property Disappears when Small Software Escrow Provider Closes Business without warning.

by Chris Smith
President, Escrow Associates, LLC

With licensed software now mission critical for most companies in nearly every industry throughout the world, escrow services for these licensed technology assets have become as common as the licensing agreements themselves. End users have grown to embrace third party technology escrow agents as a key component of their business continuance plan and software developers have learned to use these escrow agreements as sales tools when building value for their potential clients.

Escrow agreements bring tremendous value to both primary parties, but often not considered is the potential failure of the third party escrow agent. What would the developer and end-user do in the event the escrow agent fails? Recently, this issue surfaced for the first time in the technology escrow industry and the total financial and operational impact on the effected companies is yet to be determined.

From its inception in the early 1980’s, the technology escrow industry has had two tiers of service providers. The larger, more stable, tier one providers each have a comprehensive suite of services and benefits and are widely agreed to be Escrow Associates, Iron Mountain and NCC. The tier two segment of the industry consists of several much smaller organizations with far fewer resources at their disposal and offer much more limited protections for their clients.

As the technology escrow industry has been evolving over the past three decades, there has always been a universal question posed by software companies who must place their software into escrow for one of their clients: “Why should I pay more for a Tier One escrow service since the escrow protection is really for my client?”

That question has been clearly answered recently when a small, tier two technology escrow provider based in Nebraska ceased operations and simply disappeared without warning. Without notice, their website was taken down and their phones were left unanswered.

This sudden implosion forced many software companies in the escrow market searching for answers to very critical, and potentially devastating questions:

1. What happened to their escrow provider?
2. More importantly -- What happened to their intellectual property?

While these questions are still unanswered, hindsight revealed certain steps that could have been done to ensure their assets were placed securely with a viable escrow agent. Moving forward, protect your interests by investigating these five areas when performing due diligence and evaluating potential escrow agents.

1. Credit Profile - Check the escrow agent’s D&B credit profile to determine their level of financial strain, if any.

2. Certificate of Insurance - Ask your potential escrow provider to provide a certificate of their current professional liability insurance. This type of insurance protects you from the gross negligence and willful misconduct of the escrow provider. This type of insurance requires a custom underwriting process for our industry and is expensive. Any provider that lacks this type of coverage may not be fully committed to this industry.

3. References - Ask to speak with some clients and attorney references. Most attorneys will only refer their clients to reputable escrow agents that they have worked with in the past and with whom they have a successful track record.

4. Storage Facilities - Ask the escrow agent to provide a detailed description of how and where the escrow deposit will be stored. Intellectual property is most often stored on magnetic media. A media vault is the only appropriate storage location for escrow deposits.

5. Size of Organization – Ask the escrow agent how many employees they have, determine if they have professional offices or if they work from home. While there are many industries that are conducive to home offices the technology escrow industry is not one of them. Surprisingly, many tier two escrow agents cannot afford to operate professional offices.