The Basics Of Software Escrow

In today’s increasingly digitalised world companies spend millions of dollars on the development of custom software applications that are critical components of their business’s operations. Because these custom-made software applications are so important, an increasing number of companies are requiring the developers of this software to maintain a stored data bank of the source codes they have created, and the attendant documentation that comes with it, in something called a software escrow

Considering its high value to the company that has spent so much money to have software developed, it’s necessary to protect and preserve this important data. The way to do this is to put in place a software escrow agreement as a kind of insurance policy against the loss of this precious source code.

The way a software escrow works is that the software developer who has custom-created the software source code deposits it along with the documentation on how to use it into the care of a trusted third party called the software escrow agent. An agreement is made that allows the source code to be released to the beneficiary, in this case, the client, in the event of a “release event” such as the software developer filing for bankruptcy, going out of business, or failing to live up to certain obligations under the license. If any of these release events take place, the insurance premise of a source code escrow is then allowed to be revealed.

What that does is allow the client to obtain the software source code they have paid for and hold the exclusive license to, to continue to be able to use it, and if it is agreed upon in the licence, to maintain and improve upon the software without requiring the developer’s involvement. Having these rights granted enables the business to continue its operations without undergoing any interruption or negative impacts. This means having the ability to maintain the software by repairing bugs and ensuring compatibility with the occasional necessary system upgrades, or giving the client some time until they can source a new code supplier.

The most commonly considered benefits of maintaining a software escrow for this critical custom source code are what it can do for the client, but the agreement also brings advantages to the software developer, vendors or distributors, allowing them to stand out from the competition by displaying a legal demonstration of their product’s value.

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