A Guide to Software Escrow

By Dipankar Das, Gaea News Network
Monday, December 28, 2009

software_services1  What is Software Escrow:

When you arrange for your software to be written by an external developer, you and the developer can agree that a copy of the source code will be given to a neutral third party - an escrow agent. The agreement should mention that under what terms and condition the source code is going to be released.

When do you need Escrow account:

When you contract out your software to be written by any outside developer, you need to make several decisions.  One of the crucial part is what the developer will do in terms of source code during delivery of the software. You may need the source code down the road to make necessary changes or any bug fixes.  What is going to happen if the outsourced company goes out of business for bankruptcies or the developer may die. On the contrary, the developer may want to retain the software or may ask you extra money to release the source code. That’s where the role of the escrow account arises. You can request the company or developer to retain the source code with a third party agency, the escrow account.

What is Software Source Code:

Source code is a collection of statements written in human readable programming language. Programmer write source code to instruct the computer about the type of action it will take. The source code that builds the program is kept in a text file or database. When you purchase a program, usually, you receive the executable code and that is a machine language format. In order to change the software or any other fixing of bugs, you need the source code.

What is Software Escrow agreement:

Choosing the right Software Escrow services is the next major step. Although, you can do a google search to find many listing, but, it is equally important to know their pricing, how long they are into Software Escrow the type of services they actually offer and the number of Escrow actually claimed. Also, you can check any negative feedback about those companies through Better Business Bureau.There are three types of Escrow agreement Plan, namely, Single user Plan (SUP), Multi User Plan (MUP), Investor Security Plan(ISP).

  • SUP: The single user plan is for software that will only be used by one business. Usually, it is going to be highly customized software and the cost is also very high. There are three signatories for this agreement, suppliers, the licensed user, and the software escrow agent.
  • MUP: In this type of plan, the software is sold to many different users or licensees. This is suitable for packaged software. There are two signatories, the escrow agent, and the software supplier.
  • ISP: Investors Security Plan is to protect software investors from fraud or scams,as huge sums of money are often involved with software development. In this case, investors, developers, and the escrow agent need to sign the agreement

What is the cost of software Escrow :

  • In most cases, software escrow companies will charge both the beneficiary and the developer for getting their services. In this way, the cost is usually diversified so that the load is not going to be very high for every participant in this contract.
  • If there is more than one beneficiary, everybody has to pay the fee. Generally, the fee is the same that they would have paid in case there is one beneficiary.
  • If there is more than one developer, all of them have to pay the fee to the Escrow account.  Escrow agreement does not only protect beneficiary, it also protects the developer. Most of the software Escrow services provide yearly and renewal rate

What are the procedures for Software Escrow:

  • Agreement: The Escrow agreement is done among licensor as depositor, his licensee as beneficiary, and an escrow agent.
  • Deposit: The licensor, as per the escrow agreement, delivers the asset to be escrowed, and change the ownership of it, to the escrow agent. The asset contains a copy of a source code and a copy of an object code, documents such as design, specification, flow chart, manual, maintenance material etc.
  • Custody: The escrowed agent puts the asset in a sealed container. Once it is sealed, the agent or other person is not allowed to access it.
  • Delivery: If any incident mentioned in the agreement occurs, like lisensor goes bankrupt, no maintenance for a certain period of time, the licensor’s closing his place of business, etc. the agent delivers the asset to the licensee on request. If the licensor raises an objection for delivery, he can hold the asset till the matter is settled between the parties.
  • Fees: The licensor usually pays the fees. licensee is allowed to pay it to secure the continuance of custody.
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June 11, 2010: 7:09 am

Software Escrow is very essential nowadays. We do not have many Software Escrow agents here in India yet, but day by day new software entrepreneurs are feeling the need of the presence of good and reliable escrow agents.

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