By Jonathan Chisholm
Software escrow is an agreement between the software developer, the licensee, and a third-party escrow agent to mitigate risk when negotiating a software or technology license. When you think about it, a software escrow agreement is like “insurance” for mitigating risk if something unforeseen were to happen. In most cases, the escrow agreement becomes the solution to the problem, like your car insurance agency after an accident.
But who pays? That’s a question we hear a lot, and the answer is … “it depends.”
Software Escrow Service Fees
Most escrow providers have three types of service fees that make up a typical escrow contract:
- Contract Setup Fee (one-time)
- Annual Fees paid each year to renew the relationship
- À La Carte fees for additional services added to the relationship, such as:
- Dual Vaulting: To store and manage deposit material in two separate climate control locations in the US/Canada
- Remote Vaulting: To store and managing deposit material in two remote locations outside North America
- Custom Contract Fees: Custom escrow language and/or terms beyond the standard agreement
- Escrow Verification Services: Four levels of verification services to verify the deposit materials and test them
Who Should Pay for the Escrow Relationship?
Believe it or not, this question happens to be one of the age-old questions of technology escrow. Software developers believe their licensees should pay for the agreement and all the associated fees. On the other hand, the licensees believe the developer should pay for the escrow relationship as a “cost of doing business.” The best answer I can give to end this argument is: if you want to set the terms of the agreement, you should be the paying party.
When the developer pays for the escrow agreement, licensees tend to operate with a false sense of security and only revisit the escrow account during key milestones throughout the business relationship. In reality, the licensee should monitor the escrow account fairly frequently (at least once a quarter).
When the licensee pays for the escrow agreement, there’s more attention paid to the escrow deposit schedule and maintenance of the escrow account. As the business relationship evolves, licensees will pay closer attention to the developer’s business activities in parallel with their escrow deposits to ensure there are no surprises if the developer starts to experience a financial setback. (Once your developer is in crisis mode, you’ll have very little chance of getting much cooperation from them, for the simple reason that they are primarily concerned with self-preservation.)
As a note, your escrow provider should provide a resource like Iron Mountain’s Escrow Management Center portal to monitor deposit activity, set alerts to remind personnel of expected deposit dates, and request additional services to be performed, etc., so, the escrow account is not neglected.
Contract Language on Payments
The goal of the escrow agreement is to protect the licensee if something were to happen to the developer. If the licensee is paying for the escrow agreement, I suggest negotiating language that holds the developer responsible for all payments required to correct any mistakes with the escrow account.
For example, all of your verification tests should have specific, documented objectives before your escrow provider starts validating your escrow material. If the accuracy of the material does not allow the escrow provider to meet the desired objectives, then the test should be considered a “fail” and the developer should be responsible for re-performing the test and paying the associated fees as their penalty.
If there are disputes between the developer and licensee, it doesn’t matter to the escrow agent how they are resolved – arbitration, courts, or mediation. However, the parties should never have the escrow agent as a mediator or part of the process other than to provide the arbitrators with information on the escrow if needed. In our experience, most parties resolve the issues before getting to arbitration and issues tend to be more about the relationship performance rather than the escrow mechanics.
A final word of advice … it’s important to figure all payment and dispute terms at the start of a software escrow relationship. This will save you time and headaches in the long run.
Want to learn more?
Read: What’s in Your Software Escrow Deposit?
Read: Why Would you Verify your Software Escrow Deposit?
Jan2020, Software Magazine