Escrow Associates

The Ironic Twist of Software Escrow Agreements

by Chris Smith
President, Escrow Associates, LLC

In the 21st century, virtually every company, educational institution, hospital and government agency relies upon licensed technology to conduct and improve their business on a daily basis. While these organizations typically spend significant time and money to insure their physical property and other assets required to operate their business and generate profits, many of these same organizations fail to recognize the need to protect the technologies used to operate and enhance their business operations. Many business continuity plans fail to consider the adverse impact to revenue streams, profits or critical intellectual property should certain technology assets suddenly fail. A technology escrow agreement can be formed with all applicable parties to detail the specific conditions in which the critical technology would be released from escrow to the beneficiary so they can support their application. A properly established technology escrow agreement can provide the end-user organization with conditional access to the source code or other critical information required to maintain or improve the technology, once provided by the technology vendor.

There are many different applications for technology escrow agreements. End-users of software utilize software escrow agreements to provide conditional access to source code if a vendor fails to support the obligations of a license agreement or ceases normal business operations. However, technology escrow is not limited to the software or computer industry and has found applications in protecting franchisees of national restaurant, ice cream, smoothie and other chains to provide conditional access to critical menus or formulas should a franchisor go bankrupt or otherwise fail. When utilized properly, an escrow agreement can protect investments in many types of intellectual property.

Selecting the appropriate escrow agent for a critical technology escrow transaction requires some careful consideration. As the technology escrow industry has evolved over the past 30 years, certain standards have been set by industry leaders. Four key elements are required to provide quality escrow services and the necessary protections for the escrow deposits and the parties involved:

Experience – A technology escrow agreement is essentially an insurance policy for licensed technology assets, so the agent must have many years of technology escrow experience and an extensive track record in administering and establishing complex escrow transactions. Relying on a trusted name in the industry can create an invaluable technology escrow service.

Facilities – Critical technology held in escrow is most often submitted on some form of magnetic media, such as CD-ROMs, DVD’s and magnetic tapes. A credible escrow agent will only utilize state-of-the-art media vault facilities for storage, which are designed specifically to preserve and protect electronic media. Electronic media can degrade quickly if not stored in the appropriate environment, therefore bank vaults, off-site storage facilities or secure filing cabinets are not appropriate storage environments for electronic media.

Protections – Financial stability, professional liability insurance protections and security procedures are critical evaluation points to consider in an escrow provider. Be wary of escrow agents that severely limit their liability under the contract. Working with an agent that understands and accepts the responsibility to administer the escrow agreement and protect the deposit materials provides an invaluable service to all parties.

Services - A professional, technology escrow specialist will provide timely information regarding the escrow account. More innovative escrow providers have developed online account management tools (similar to online banking) to provide immediate access to all relevant account information. Additionally, some firms even provide a FTP (file transfer protocol) web site to allow technology companies to easily submit deposit materials or critical updates.

In summary, a well-crafted escrow arrangement with an appropriate escrow provider can protect a critical investment in technology. Investments in powerful technology can yield tremendous returns; therefore protecting those investments with an appropriate escrow arrangement can enhance any business continuity plan.