By John Boruvka
As a software developer, you want your prospects, customers, and partners to have confidence in your company. Did you know a software escrow agreement could help instill trust into the buying process for both on-premises or Software-as-a-Service (SaaS) applications? Although the buyer or licensee is often the party that drives the escrow requirement, savvy developers are wise to offer escrow proactively as an assurance to their customers. Learn why software escrow is strategically important for developers and follow this essential checklist to get started.
First, a quick summary of what software escrow is, why it’s needed, and how developers can benefit. With escrow, a trusted, neutral third party keeps a copy of your software source code in a secure, environmentally controlled location in case it is needed to recreate the software application in the future. This helps both you and your customer (the licensee) to mitigate risk if you are unable to support that product at a later date. Reasons for an escrow release are specified in the agreement and could include bankruptcy, obsolescence, merger, or acquisition – all things your customers worry about. If a release condition occurs, the escrow agreement lets your customer access the source code to keep their business up and running. This type of contingency plan gives your customer confidence and an added incentive to work with you.
Here’s why software developers should proactively encourage an escrow agreement:
- Close deals quicker. With the right escrow agreement, you’ll offer the investment protection your customer needs to feel comfortable closing the deal.
- Level the playing field. Your technology may be leading edge, but there is always a safer choice with a large vendor that has a stronger track record. Escrow levels the playing field by neutralizing the risk.
- Assure customers that your company is safe choice. Prospects tend to be hesitant without assurances, especially when working with small or unproven vendors. By offering software escrow, you will reduce your customers’ risks of licensing or subscribing to software and, consequently, you will help ensure their business continuity.
- Protect your intellectual property. Protecting your IP is of the utmost importance. Simply turning over your code to customers is not an option because if your code is compromised in any way, you’ll lose your competitive advantage and miss out on new business opportunities. With an escrow agent, your code will be secure and protected.
So, how do you begin the process to leverage software escrow?
Step 1: Establish a Core Team
It is important to establish a core team to represent all of the departments that should have input into the risk management policy and processes that you are trying to create for your organization. Since escrow should be a part of your overall risk management strategy, it is important to get all necessary teams onboard. We typically see that a core team includes representation from legal, contracts, IT, sales, and senior management.
Step 2: Create a Repeatable Process
Once you have a cross functional team, the next step is to define your escrow policy and create a repeatable process that simplifies your ability to address prospect concerns and close business faster. The goal of this process is to establish a set of minimum standards to make it as easy as possible for you to establish an escrow agreement. A Master Escrow Agreement provides your organization with proven developer best practice escrow terms while maintaining the flexibility to modify the terms to meet the unique nature of each of your license agreements.
Step 3: Plan for Verification
Verification is the validation of the deposit materials in the escrow account. Since your technology is complex, there is much more needed than just the source code. Even if your customers had the source code, they can’t do anything without build instructions. Other dependencies like third party libraries or applications are also critical. A thorough verification of the escrow materials provides assurance that, in the event of a deposit release, the licensee would be able to quickly and effectively read, recreate, and maintain your technology in-house. More importantly, a verified deposit assures your executive team and board that all the technology needed to recreate the product is safely stored, strengthening your IP claims in the future.
Step 4: Are you a SaaS provider?
There has been a monumental shift in the way that technology is being delivered and many applications are now hosted in the cloud by SaaS providers. SaaS or cloud solutions can provide significant benefits to your customers which is why most new applications are now being built for the cloud. However, nearly half of IT leaders believe SaaS is riskier than on-premises software, according to an IDG QuickPulse survey sponsored by Iron Mountain. If you’re a SaaS provider, there are escrow agreements specifically designed to protect SaaS applications and data. Make sure you understand the level of coverage you need and how you are protected.
Step 5: What’s in the Deposit?
A software escrow agreement is more effective if all of the right materials are deposited. Only the developer can determine which materials are necessary to achieve the licensee’s goal, since you are responsible for providing the software solution and making the deposits into the escrow account. In the escrow contract, standard language is recommended to be comprehensive; for example, “the developer agrees to provide the source code, and all the files, tools, and supporting documents for their licensee to compile their source code.”
Step 6: Maintaining Your Escrow Account
After the deposit materials are determined, both parties need to agree on a regular deposit schedule. Both the licensee and the developer have a stake in making this agreement work properly, and to do so, complete deposits must be made in a timely manner – no plan will work effectively if it is neglected. The escrow agent’s role is to facilitate that process and provide notices and tools to manage the escrow account.
In summary, it’s always wise to start thinking about software escrow from a strategic viewpoint. How will it help? How will you make sure you provide all the necessary supporting materials? How can it be verified? What needs to be done to keep the agreement up to date? From there, the specifics can be determined for a successful escrow agreement.
Case Study: How Software Escrow works for Stratus Technologies
Stratus Technologies’ clients wanted to make sure that they had the right to access and use their proprietary technology and software to enable continuing operation and support their critical operation should Stratus be unable to provide the required support. Without an escrow service with a well-recognized and trusted provider such as Iron Mountain in place, transactions with certain clients would be delayed or impossible.
“The fact that we have an escrow arrangement with Iron Mountain in many cases enables us to do business with some customers that wouldn’t otherwise do business with us [unless] they were assured that we had the means and the capability to protect our software and make it available to them.”
–Vice President and General Counsel, Stratus Technologies
Want to learn more?
Read more about how Stratus uses software escrow
Watch the Video: Eliminate Business Hurdles with Software Escrow
About the Author
John Boruvka is the vice president for Iron Mountain’s Intellectual Property Management (IPM) group. He has been involved in the technology escrow and intellectual property management field for more than 32 years. His focus is helping companies create solutions relating to protecting intellectual property assets. To contact an Iron Mountain escrow advisor directly, please call 800-962-0652 or email firstname.lastname@example.org.