How a technology escrow agreement helped NetFacilities close new business.
by Chris Smith
President, Escrow Associates, LLC
In 2002, a successful facilities maintenance company developed an exclusive, web-based work order system that allowed clients to send and monitor work orders from start to completion. This system was so successful in scheduling and providing services that clients wanted their own web-based work order system to send and monitor work orders from start to completion to all of their vendors and in-house maintenance staff to better manage their operations. To deliver this powerful application NetFacilities, Inc was formed in 2002 and officially released their solution for live use in 2003.
NetFacilities was quickly able to gain the attention of many organizations, both small and large, that realized the potential efficiencies and cost savings of managing their facilities via the NetFacilities tool. However, these organizations also realized that relying upon NetFacilities for such an important role may have risk as well. NetFacilities has fantastic technology but the company is delivering an ASP (100% web-based and hosted by NetFacilities) which raised a few questions about how to make sure clients are protected.
Recognizing prospective clients’ concern, NetFacilities wanted to provide a solid contingency plan for clients in order to ease their potential concerns about the “software” being available no matter what happens to the company. NetFacilities turned to Escrow Associates, LLC to design a comprehensive technology escrow program for NetFacilities to offer prospective clients a business continuance plan and clearly demonstrate that NetFacilities is committed to their long term success.
Escrow Associates provided all the assurances that should be expected from a Tier One technology escrow provider; state of the art media vault storage, experienced staff, professional liability insurance, FTP depositing services, online account access and more.
NetFacilities selected Escrow Associates’ flexible Two-Party escrow agreement to provide their clients with superior escrow protection and afford NetFacilities the flexibility to offer each client unique escrow terms if necessary. The Escrow Associates solution provides NetFacilities with the flexibility and efficiently required so they can meet their escrow requirements responsibly and still have time to focus on growing their client base.
Chris Smith is President of Escrow Associates, LLC, the industry leader in providing innovative technology escrow solutions worldwide. Chris has nearly ten years experience helping Fortune 1000 companies and technology companies of all sizes establish effective and secure escrow arrangements. To learn more about Escrow Associates explore our website or call 1-800-813-3523.
How savvy companies protect their business interests by ensuring access to critical technology should a critical technology vendor fail to continue support.
by Chris Smith
President, Escrow Associates, LLC
In the early 1980’s the practice of forcing a software developer to place source code, build instructions and other documentation into an escrow agreement with a neutral third party became a part of business continuance planning for many licensees of enterprise or custom software. A “software escrow” agreement is designed to provide the licensee or “beneficiary” with access to and a license to use source code to support the licensed software application if the software vendor ever fails.
While this practice seems like good business planning for the licensee it often feels like an insult to the software developer. The developer is contractually obligated to deposit sensitive intellectual property with a third party and forced to update those materials each time the technology changes. Even though the practice of software escrow is wide spread and usually just part of a company’s business continuance planning it often feels invasive to the depositor.
Now for the ironic twist. The party that typically benefits to most from having the escrow agreement in place is the depositor themselves! That’s right! The depositor is often the party that benefits the most from having the escrow agreement in place.
First, the escrow agreement helps software companies gain additional clients. This is especially true for younger, start up software companies that do not have a track record, a large enterprise client base or significant revenue or profits. The escrow agreement helps them convince their prospective clients that they understand that any client would want protection for their investment in licensed technology. It also demonstrates a certain sophistication on the part of the software company proving that they have been down the escrow path before in other enterprise transactions.
Second, the escrow agreement provides the beneficiary with peace of mind that they would not have with out the escrow protection. In some cases this peace of mind will make beneficiaries more patient if a software company is struggling with support, faced with a financial crisis and etc. With the escrow agreement in place, the beneficiary already has a “plan B”. They do not have to search for replacement software if their vendor experiences a down turn. They have the escrow agreement in place as their “plan B”.
Finally, even in the worst case scenario of a software company’s demise the escrow agreement may benefit the depositor more than the beneficiary. In some cases, the fact that the escrow agreement was in place kept the beneficiary “out of the market” for replacement software when a vendor failed. The beneficiary is often able to utilize the escrow deposit along with support from key personnel from the now defunct software company to support their application and derive the value from their investment. Key personnel are often hired directly by beneficiaries to support the technology on a contract or employee basis. In some cases, the beneficiaries actually become clients of the depositor again once they have cleared the bankruptcy process.
Certainly, the beneficiary to an escrow agreement receives the peace of mind they desire as well as a workable business continuance plan that addresses the all too real possibility that their software vendor may not make it long term in this dynamic industry. However, the depositor also derives significant benefit for having established the escrow agreement. Ironically, in the end the depositor is also a beneficiary.
Chris Smith is President of Escrow Associates, LLC, the industry leader in providing innovative technology escrow solutions worldwide. Chris has nearly ten years experience helping Fortune 1000 companies and technology companies of all sizes establish effective and secure escrow arrangements. To learn more about Escrow Associates explore our website or call 1-800-813-3523.
When should a software or technology escrow agreement be established?
by Chris Smith
President, Escrow Associates, LLC
Over the past thirty years, end users of technology have learned that software and technology escrow agreements offer protection for technology investments by providing the end user with access to source code or other critical information in the event of certain, pre-negotiated circumstances. In addition, in some situations, an escrow agreement can provide increased leverage for obtaining better support from a technology vendor when support services suffer.
Escrow agreements have long been popular among larger corporations when entering into software licensing transactions. However, on an increasing basis, smaller companies are now calling for escrow agreements as they have come to rely more heavily upon technology to operate their business and maintain their competitive advantage
As the technology escrow industry has grown, the Tier One, or full-service providers, have evolved and brought significant innovation to the industry. For example, Tier One providers offer specific technical expertise to perform tests on escrow deposits to ensure the materials are complete and accurate and incorporate cutting edge technology to allow clients to monitor and manage their account information electronically via web based tools. More progressive agents are now accepting escrow deposits electronically via FTP sites to expedite the process for all parties.
However, despite all the advances aimed at helping end users protect their technology investments, a few glaring errors by end users continue to occur when requiring escrow services as part of their technology transaction.
The most common error is determining when to establish the escrow agreement.
When to Escrow?
Research indicates there is a natural tendency for both the technology vendor and end user to delay the establishment of the escrow agreement and submission of the deposit materials. The common license agreement calls for the escrow agreement to be negotiated at some later date some 90-120 days after that.
Yet, end users typically have begun paying, in some form, for the technology well before it is ever installed. There are license fees, legal fees, customization fees and additional costs already invested. Also, there are often key milestones that are negotiated into the license agreements that call for incremental payments to be made to the software vendor while the technology is being developed, customized or prepared for installation. This “pay as you go” relationship makes sense.
However, the logic behind the escrow agreement should also dictate that the escrow agreement be negotiated and executed at the same time as the license agreement. Then, each milestone that triggers a payment should also trigger an associated update to the deposit materials. This reciprocal type of arrangement keeps each party’s “value” on equal footing during the development or installation period and provides an alternative for the end user that increases in value with each milestone and associated update to the escrow deposit.
When to Require an Escrow?
Software and Technology escrow agreements can be customized to provide protection for virtually any type of intellectual property. A short list of examples would include but would certainly not be limited to; source code, object code, websites, hardware, hardware designs, manufacturing processes, customer lists, domain names, names and contact information for key employees and more.
Anytime a company, government entity or organization relies upon technology or intellectual property for critical applications, an escrow would help mitigate the risks associated with this reliance.
Far too frequently we receive a call from a rather desperate end user of technology that is trying unsuccessfully to have their technology vendor comply with their verbal commitment to establish and maintain an escrow agreement on their behalf.
The typical scenario is that of a company that relies heavily on technology from a key vendor and when they started working with this vendor there was a verbal commitment to escrow the technology for the project.
The end-user took them at their word and assumed that the escrow had been established. In the meantime, the end-user’s reliance upon this technology for their business operations has increased significantly. Then, during their course of business, they learn that the escrow was never established and that their software vendor is struggling financially and may file bankruptcy soon. In many cases the executives that had agreed to the escrow have now left the company and the current management refuses to even talk about the escrow.
An escrow agreement established at the appropriate time and maintained over the course of the relationship would reduce these risks. Rather than trying to get the escrow established in the 11th hour, the end-user company could simply be requesting a technical verification of the deposit materials to determine the entirety and accuracy of the escrow deposit in their preparation for filing for a release of the deposit materials to support their application.
An escrow agreement established at the appropriate time and maintained over the course of the relationship would reduce these risks. Rather than trying to get the escrow established in the 11th hour, the end-user company could simply be requesting a technical verification of the deposit materials to determine the entirety and accuracy of the escrow deposit in their preparation for filing for a release of the deposit materials to support their application.
In summary, it is never too early to establish an escrow agreement but it can often be too late. The cost of the escrow service is nominal compared to the costs of most technology investments and the impact of lost productivity or lost profits that would result from the absence of the functioning application.
If the transaction warrants an escrow agreement, require the escrow agreement to be fully negotiated and fully executed simultaneously with the license or service agreement. The escrow deposit materials can be and usually are deposited at a later date. In fact, the escrow agreement may be modified to require the escrow deposit by a certain, pre-arranged date. Proceeding in this fashion contractually obligates the software vendor to make the escrow deposit and the escrow agent’s notifications will keep you informed as to if / when the escrow deposit was made.
Chris Smith is President of Escrow Associates, LLC, the industry leader in providing innovative technology escrow solutions worldwide. Chris has nearly ten years experience helping Fortune 1000 companies and technology companies of all sizes establish effective and secure escrow arrangements. To learn more about Escrow Associates explore our website or call 1-800-813-3523.
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:
- What happened to their escrow provider?
- 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.
- Credit Profile - Check the escrow agent’s D&B credit profile to determine their level of financial strain, if any.
- 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.
- 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.
- 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.
- 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.
Chris Smith is President of Escrow Associates, LLC, the industry leader in providing innovative technology escrow solutions worldwide. Chris has nearly ten years experience helping Fortune 1000 companies and technology companies of all sizes establish effective and secure escrow arrangements. To learn more about Escrow Associates explore our website or call 1-800-813-3523.
by Chris Smith
President, Escrow Associates, LLC
A 2007 market research study performed on the software and technology escrow industry uncovered a common theme of praise for Escrow Associates' fair and modifiable escrow agreement templates.
Most notable in the research was the flexibility of the release conditions in the Standard Three-Party Escrow Agreements and Master Two-Party Software Escrow Agreements offered by Escrow Associates headquartered in Atlanta, GA. Samples of each agreement are available upon request at www.escrowassociates.com or by calling 1-800.813.3523.
"I think that was probably how I selected Escrow Associates to begin with because they did have a very nice template (agreement)…. I gave them a call and they were able to walk through the different clauses, why it's there, the importance of each clause…" recalls one end-user.
Because each technology transaction differs from the next, Escrow Associates has emerged as a leading provider of escrow services by offering the flexibility of tailoring these agreements to best suit the needs of the parties.
"I think it's important because, especially in smaller deals, we don't want to waste a lot of time renegotiating things that don't need to be renegotiated. If there is a professional template that we can work with, great," notes one participating attorney. "Now obviously the conditions for withdrawal are going to be unique. We're going to look at the language in the agreement and potentially negotiate things in addition, but yes, it's always helpful to have something to start with."
Chris Smith is President of Escrow Associates, LLC, the industry leader in providing innovative technology escrow solutions worldwide. Chris has nearly ten years experience helping Fortune 1000 companies and technology companies of all sizes establish effective and secure escrow arrangements. To learn more about Escrow Associates explore our website or call 1-800-813-3523.
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.
Chris Smith is President of Escrow Associates, LLC, the industry leader in providing innovative technology escrow solutions worldwide. Chris has nearly ten years experience helping Fortune 1000 companies and technology companies of all sizes establish effective and secure escrow arrangements. To learn more about Escrow Associates explore our website or call 1-800-813-3523.