Published OnFebruary 10, 2020Did you know you can create a risk mitigation strategy for business-critical software that’s provided via a reseller of the solution?
We all know that technology is constantly changing, so naturally, it makes sense for businesses to change the way they license/sell their solutions. Today, software companies are utilizing a number of different distribution strategies to deliver their software, and for the sake of speed-to-market or building on someone else’s technology or platform, resellers are often leveraged for their agility.
Did you know: You can create a risk mitigation strategy for business-critical software that’s provided via a reseller of the solution? I know what you’re thinking, how can a reseller provide a contingency plan for a solution they do not own? Allow me to explain.
A Technology Escrow Agreement “is a lot like a prenuptial agreement before you get married. You hope you never need it, but if worse comes to worst, you want to be prepared.” (Software Escrow For Dummies Guide)
In order to create a “Reseller Escrow Service Agreement,” the software company and the reseller typically have an agreement that allows them to resell and perhaps couple their own IP with the software company’s IP to deliver a downstream product or service that may rely on technology from both parties.
Let’s imagine we have two companies, a software company and their reseller in full agreement to establish an escrow arrangement. The software company is known as the “Depositor” and the reseller is known as the “Reseller.” A Reseller Escrow Agreement allows a reseller the right to enroll their clients to the escrow agreement. The reseller’s clients in the escrow agreement are known as the “Beneficiaries,” effectively the end-users. But remember the reseller has risk as a “Beneficiary” as well, as it uses the technology and likely does not have access to the code base.
As the escrow agent, Iron Mountain will require the parties to confirm the following information in order to create the first draft of the contract:
- The legal entity name and the role of all of the parties (Depositor, Reseller, Beneficiary)
- Which parties will be making deposits, and will there be more than one deposit account?
(Is there IP and code from both parties?)
- What are the specific release conditions being contemplated, and are there tiered release conditions? (Meaning the Reseller may have access, but the Beneficiary only has access if both the Depositor and Reseller are gone.)
- What are the mechanics of the release process?
- Which parties can issue contrary instructions?
Once these questions are answered, a customized escrow agreement is created reflecting the information provided. Here are a few key pieces of information that are included in the arrangement as standard best practice:
- The Escrow Agreement is a supplementary agreement to the main agreements between the parties to align with Chapter 11, Section 365(n)
- The Reseller has the right to enroll Beneficiaries to the escrow agreement
- In the event of a release, the software shall remain the Depositor’s property and the Reseller and Beneficiary only have the right to use the software based on the terms/conditions of their respective agreements.
The Depositor, Reseller, and Beneficiary have typical rights and many of the same responsibilities as in a traditional Three-Party Escrow Agreement. The unique terms tend to surround what is being placed in escrow, how is it accessed, the sequence of release and the use rights of each party if released.
Another thing to remember is that validation and verification of the escrow materials are always of critical importance. If the software company disappears and the escrow account is missing information, there is very little hope of correcting the problem if/when the material is released to the Reseller to support the Beneficiary, or ultimately for the Beneficiary to support itself.
Generally speaking, the critical terms in any escrow agreement are:
- Deposit contents, deposit update frequency, and verification rights
- Release conditions, release process (objection period and contrary instructions)
- Dispute resolution (governing law)
- Rights to use following a release (subcontractors, porting, etc.)
- Escrow payments of fee
- Term and termination of the escrow agreement
Establishing an escrow agreement to mitigate risks in reseller-type arrangements is possible, and just requires that you work with an experienced provider that understands the issues first hand, has a solid track record, and has the stability to be there when the escrow is needed.