Published OnJuly 15, 2019Let’s really think about this — Who creates the value for an escrow agreement?
“Expectations are resentments waiting to happen” — Anne Lamott
I recently attended an event in Boston where I had the opportunity to mingle with a large group of Intellectual Property lawyers. Out of all the conversations that I joined, there was one that really left an impression. A private practice lawyer who recently left a legal position at large software developer company shared a story of his countless years of escrow experience and how silly he thought the entire practice was.
His comments were along the lines of: “I’ve negotiated hundreds of software escrow contracts, and we hardly ever made more than two or three deposits during the life of the agreement.” This person went on to say, “Seriously, even if there was a release there’s no way anybody could manage the source code on their own.” Since it really wasn’t the time or place for a spirited debate, I chose to listen to and acknowledge his point of view rather than challenge his thinking – until now.
Let’s really think about this — Who creates the value for an escrow agreement?
A software escrow agreement (also known as a source code escrow agreement) is an agreement between three parties – the software developer, the buyer or licensee who uses the software, and a neutral, third party such as Iron Mountain, who is the escrow agent.
- The developer’s role is to deposit the software source code and other supporting materials with the escrow agent on a regular, predetermined basis.
- Iron Mountain safeguards that source code, which is the developer’s intellectual property, and will not share it unless release conditions specified in the escrow agreement are met. If there is a reason for release (such as bankruptcy, obsolescence, lack of support, merger or acquisition), Iron Mountain will release the source code and supporting materials to the licensee.
- The licensee can use the released source code to keep their business up and running by continuing with in-house development or finding and implementing a replacement for a suddenly unsupported product.
The value of a software escrow agreement is created when all three parties uphold their responsibilities.
Roles and Responsibilities
For an escrow agreement to be useful, each party must understand what they bring to the table, and ensure they are adding value. This begins with the developer making timely, complete, and accurate deposits to the escrow account. As new functionality is added and technology is enhanced, updated deposits should coincide with these enhancements.
Software licensees should build a specific, required deposit schedule into the escrow agreement. If the licensee isn’t policing the developer’s deposit process, then there’s a higher likelihood of an incomplete deposit account. This ensures all the materials in the escrow account are accounted for and up to date in case a release is needed – and all parties have a clear set of expectations to follow. Licensees should also make sure the appropriate release conditions and use rights are specified in the agreement.
The escrow agent’s role is to protect the software source code and, if needed, release it when the conditions are met. Security is a core competency for Iron Mountain, and we can also help validate the accuracy of the escrow material with escrow verification services. With more than thirty years’ experience in the industry, our statistics show that over 70 percent of all escrow deposits sent in for analysis were determined to be incomplete. Without verification, you could run into big problems.
At the end of the day — it’s a two-way street.
“Banking” Intellectual Property
Think of it this way … an escrow agent is like a bank that securely holds intellectual property instead of money. The value of the escrow relationship depends on the information that is submitted into the deposit account.
If you consider your relationship with a bank, have you ever been upset with your financial institution when a direct deposit check isn’t received? Do you ever yell at your bank when you have insufficient funds in your account and you’re unable to pay your bills on time? Of course not. If a check hasn’t been received, you typically call the party responsible for submitting the check to find out what happened. If you have insufficient funds in the bank, you usually review your spending activity to figure out how you miscalculated. The primary expectation that we have for a financial institution is protection. We expect the money that goes into the bank to stay in the bank until we need it.
Thinking back to the lawyer who formerly worked for a software developer, his company was truly doing a disservice to their customers by not upholding their end of the bargain and even possibly breaching their contractual obligations. By neglecting to make regular, accurate escrow deposits, the company’s software source code would most likely be out of date and unusable if there was ever the need for a release to a customer.
Instead of seeing the escrow process as bothersome, developers can instead use software escrow as a differentiator when selling their products. Custom software vendors are often small, unproven entities, but they can ease customer concerns, gain confidence, and shorten the sales cycle by offering escrow protection.
In a nutshell: How can anyone expect value in an escrow relationship when no one is willing to be held accountable?