What Is Software Escrow and Why Does It Matter?

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Super Investing

Software is becoming one of the most valuable commodities in the world today. It has practically unlimited potential for development and can be replicated infinitely. That makes it a prime choice for individuals looking to start a business.

But simply developing good, practical software isn’t enough to guarantee sales, and it certainly isn’t enough to guarantee customer satisfaction. There are some inherent vulnerabilities consumers face that must be addressed, and one of the most important is having some reassurance of security and functionality if the software company ever goes under.

What is Software Escrow?

When you really sit down and think about it, it’s quite amazing that a complex string of code that only exists in virtual form can be worth millions of dollars. But that’s exactly what software is. Software is nothing more than a proprietary string of code that helps various parties accomplish very specific tasks. As such, both vendors and licensees find software incredibly valuable to their respective bottom lines.

While, in a perfect world, the relationship between licensees and vendors would be perfect and harmonious, we don’t live in such an environment. People are greedy, businesses fail, and contracts are breached. Enter software escrow.

For software vendors, the source code behind the software is their million-dollar secret sauce. They aren’t going to simply supply businesses with this code because a confidential agreement is in place. All it takes is one mistake and their code could be common knowledge.

But from a licensee’s perspective, not having the source code is equally frustrating and scary. What happens if the vendor suddenly goes out of business? Losing access to the software could have drastic effects.

With software escrow – also known as source code escrow – both parties get what they want: protection. The source code is stored, verified, and updated with an escrow company.

software escrow protects code.
Companies licensing proprietary code protect their investment with software escrow.

How Vendors Benefit From Escrowing Source Code

Vendors should use software escrow because it protects them from having to give out their proprietary code to multiple companies. Instead, they give it to one reliable (third party) company that safely stores the code and then works with licensees to ensure they receive the updates they need. This prevents one bad contract or breach of agreement from compromising the software.

How Licensees Benefit From Escrowing Source Code

As mentioned, licensees want the assurance that – should the vendor suddenly go out of business – they’ll still be able to function and utilize the software infrastructure they’ve put in place. With software escrow, there’s an escrow agreement in place that protects the licensees’ interests.

Understanding the Escrow Agreement

While every escrow agreement is unique – and terms must be agreed on by all parties involved – most typically contain a scope of the escrow, conditions for the release of the code, obligations for the vendor and licensee, as well as obligations for the escrow agent.

While each section of the escrow agreement matters, the most important section is arguably the conditions for release. This section clearly explains what circumstances must be present for the source code to be released from escrow and to the licensee.

Generally, this includes things like: failure to abide by contractual obligations, going out of business, discontinuing of the software, or a failure to provide support in accordance with the terms.

Don’t Underestimate the Need for Software Escrow

As software becomes an even more important aspect of business in the future, look for software escrow to become increasingly popular. Whether you’re a company that purchases various software licenses and relies on them for business or a vendor that sells proprietary licenses, software escrow should be a priority.

Melissa Thompson writes about a wide range of topics, always revealing interesting things we didn’t know before. She is a freelance producer for USA Today, and a contributor at Technorati. She lives in Utah with her 2 kids and husband. Melissa Thompson can be reached via LinkedIn or Twitter @melthompson88. Please follow and friend her on either site.