What is Software Escrow?

Jim B.

Software escrow is an agreement entered into by a business and the company that issues it software that involves a third party. In such an agreement, the maker of the software, or licensor, agrees to put the source code of the software into an account held by an escrow agent, who acts as the third party. If the software company fails to maintain the services it promised to the business to which it issued the software, also known as the licensee, the escrow agent releases the source code to the licensee. Entering into a software escrow agreement protects businesses from losing software integral to running its operations.

Businesswoman talking on a mobile phone
Businesswoman talking on a mobile phone

It is nearly impossible in the modern business world to operate a business without heavy use of computers. In many cases, businesses need software that is designed specifically for them to run whatever programs they might need to conduct everyday operations. If a software company fails to render the services promised to the business, it could be potentially damaging or even lethal to that business. Software escrow is a method to protect such an unfortunate occurrence from taking place.

The key to the software escrow agreement is the source code. Source code is essentially the blueprint for any specific software, albeit written in language that is decipherable by humans. Possession of this information would allow a business to run its software without having to rely on the company that issued the software in the first place. This is the information that an escrow agent would release if the licensor of the software reneges on its initial agreement.

In a typical software escrow agreement, the licensor pays the fee for escrow services and is usually permitted to choose the escrow agent who will handle the source code. Doing it this way allows a software company to choose an agent it has used in this past. This simplifies things for the software company, since using the same agent allows for greater simplicity in terms of contracts and billing.

There are several ways that a licensor can fail to live up to its original agreement and cause the escrow agent to yield the source code to the licensee. The most common occurs if the licensor fails to provide the proper software maintenance, which would include failure to update the software or not being available for repairs. Other causes for the escrow agent to step in include the licensor going bankrupt, an acquisition or merger that changes the nature of the original agreement, or any action that violates the agreement the licensor entered into with the licensee.

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