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Escrowing Software: New Technology Safeguard

Christian Dodder, Cofounder and Chief Executive Officer, Escrow Associates, LLC

Only a handful of companies do the work we do professionally. Our role is to serve as a neutral party offering the software developer and the company licensing the software peace of mind. Once both parties enter into a contract, we provide protection for each by securing the intellectual properties should there be an unexpected disruption in the relationship.

What Is a Software Escrow Company? 

What software escrow companies mostly protect for their clients are computer source codes. Wikipedia defines source code as "any sequence of statements and/or declarations written in some human-readable computer programming language." In other words, a source code is a version of the software that human beings can read. It offers information regarding how the software program was designed and operates.

A company needing specific software generally doesn't buy that software from a developer but leases it instead. Inherent in this transaction is a sticking point that makes a service like ours necessary. To protect its investment, as well as its existence should a developer go out of business or refuse to service the product, the licensee might request that the developer provide the source codes. The codes allow the licensee to "figure out" and maintain the software should the relationship with the developer end. This concern is legitimate because of the expense involved in licensing sophisticated software.

On the other hand, a developer cannot give source codes to a licensee because they are the keys to maintaining the software independently, costing the developer revenue that results from providing ongoing support and maintenance. By turning source codes over, a developer also risks their duplication by competitors.

Why is Software Escrow Important?  

Companies use a service like ours for different reasons. A software developer might want to show potential clients that he or she believes in the product and understands that the client is making a substantial investment in the technology. By engaging a software escrow firm, the developer offers a sign of good faith by proactively protecting the potential client.

The company purchasing the software license (the licensee) values the service because the company is protected should the software developer fail to support the product. It also protects the company should the developer go out of business or discontinue the product.

State-of-the-Art Protection 

Selecting a company to provide escrow services can be complicated. There are companies out there whose idea of protecting intellectual property is throwing CD-ROMs containing such precious information into a filing cabinet. A reputable software escrow company will utilize vaults to store such CDs. The vaults are specifically constructed to house magnetic media, which is much less durable than cash or documents a bank might keep in its safe. These special vaults are kept at a constant temperature and are virtually indestructible. They are a very reliable source of data storage.

Software escrow companies are much like insurance companies. Agreements renew each year, and clients keep them for as long as they need them. Additionally, the service is affordable, often costing a few thousand dollars to set up and then a few thousand dollars a year to maintain. It is a small price to pay given the peace of mind it provides.

Getting Started 

An attorney is used to set up a software escrow agreement, often the same one who negotiated the license for them. While agreements developed between parties vary, there are boilerplate contracts that can help get the process started. Each contract is adapted to fit the various scenarios inherent in the agreement, and terms can be changed at any time upon the written consent of both parties.

Once an agreement is in place, the responsibility of the software escrow company is to maintain the spirit of the agreement, and it will follow the contract to the letter. Should one party ask the escrow company for access to the protected information, there is a thirty-day period in place allowing the other party an opportunity to object. An objection can trigger arbitration or litigation. Then the software escrow company's role is to await the final outcome and act accordingly.

Conclusion

In order to justify higher prices and expensive maintenance contracts, a software company must demonstrate valuable but cost effective solutions to mission critical areas of its customers operations. This is big business.

A company implementing new technology into a critical area of the business needs solutions to guarantee continuing operation, often required by Sarbanes-Oxley or other regulations. A software escrow agreement administered by a professional provider is often the right solution that protects the interests of both parties and proves to be the catalyst for closing their transaction.

© 2007 Ewing Marion Kauffman Foundation. All rights reserved.

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