QUESTIONS & ANSWERS ABOUT SOFTWARE ESCROW

• What is a software escrow?
• What is a reasonable cost for an escrow?
• Who needs a software escrow, and why?
• Should accountants and lawyers care about software escrow?
• Is there any standard form agreement for a software escrow?
• Who is a neutral third party?
• What is the procedure for depositing software under escrow?
• What about depositing source code via the internet?
• Does the escrow agent verify source code?
• What about updates?
• How does the user know whether updates are being kept current?
• Does it matter where the escrow resides?
• What kind of storage facility is needed?
• What events trigger a release of source code?
• Is source code released immediately?
• What is the user permitted do with source code taken from escrow?
• Can one escrow cover several products?
• If a release is triggered does the user pay to get a copy of source?
• Does a software escrow protect copyright?
• Who pays the annual escrow fee?
• Should the escrow agent be a large institution?
• Who are Lincoln-Parry?
• How can I get the name of a few reference accounts?

It is a contract that requires an escrow agent to keep physical possession of source code for a software product and release it to a licensed user, reseller or investor, but only under very specific circumstances such as insolvency of the supplier for example.

About US$950 per year. An escrow agent must administer the custody of a valuable asset, assume a degree of risk, submit timely reports, and often becomes involved in the selling process which he must have the skill not to impede.

There should be no set up charge or front end load of annual fees. Handling charges should not apply unless the number of revisions per year becomes excessive, and there should be no extra charges based on the number of users covered by the escrow.

Who needs a software escrow, and why?

If the licensed user of a software product (a) receives only machine code, and (b) the product is critically important to business operations, and (c) the product needs maintenance and ongoing development or customization, then a software escrow is worth considering.

If a reseller contracts with its own customers to provide maintenance and development for a software product owned by someone else, then the reseller is advised to either have possession of source code or have the owner place it under escrow.

If an investor, financing the development of a software product, wishes to improve the quality of collateral security, this can be achieved by a software escrow.

If a software supplier finds that sales prospects often ask whether the product can be covered by a software escrow, having one already in place assists in closing the sale.

Yes, when accountants act as auditors, the absence of an escrow on a critical piece of software might be important enough to deserve a note to the financial statements in the auditor's report.

Similarly, a lawyer whose client is buying an operating business should insist that the buyer has the right to cancel if due diligence reveals that continued maintenance and support for critical software is not assured in some way, such as a software escrow.

Even though the particulars vary, all escrow agreements are either a Single User Plan (SUP), a Multi User Plan (MUP), Investor Security Plan(ISP) or a Multi Supplier Plan (MSP) in their basic structure.

A SUP agreement is signed by the supplier, licensed user and escrow agent, and is most appropriate for highly customized software. A copy of source code is held exclusively for that particular user.

A MUP agreement is signed by the supplier and escrow agent only, and is most appropriate for packaged software. The supplier later designates in writing those users that are entitled to benefit under the escrow.

A MSP agreement is signed by the licensed user (often a large corporation) and the escrow agent, and is a master agreement. Each supplier separately adopts the master terms and conditions when they deliver product to the licensed user.

Lincoln-Parry has basic forms for these agreements and we invite your attorney to suggest amendments that might better suite your requirements. We do not charge a fee for amending our standard agreement form.

An ISP agreement is signed by the investor, developer(s) and escrow agent. It is used to give investors collateral security when funding new software development.

It is important that the escrow agent be a neutral third party.  That immediately disqualifies the lawyers for either the licensor or the licensee, and experienced lawyers refuse to act as escrow agent due to the obvious conflict of interest.

It also disqualifies escrow agents that sell other services (such as document or data storage) to the licensor, either directly or through a related company.  Typically, that storage contract produces far more revenue than the escrow agreement.  If a dispute arises, how comfortable would you be knowing that the supposedly neutral escrow agent, by acting impartially, risks offending a major customer in the storage side of its business?

Lincoln-Parry is a software escrow agent.  It carries on no other business – period.

Lincoln-Parry provides the supplier with a container(s) that can be sealed.

Under a SUP, ISP or MSP agreement both the supplier and user can be present when source is sealed into the container, and can verify its authenticity and completeness beforehand.

Under a MUP the vendor alone puts source code under seal and certifies that it is authentic and complete. Any user may later call for an inspection to verify the contents of a container.

Lincoln-Parry is not permitted to break the seal on any container.

Thirty five years ago, our containers had to be big enough to hold large reels of mag tape and manual binders. During the past decade we have noticed that floppies, DAT and CD-ROM are the preferred media, all of which are shipped by courier from points around the world.

We discourage it. Anything sent over the internet is vulnerable, even if it is encrypted. Besides, encrypted source code defeats the purpose of a software escrow unless it is later decrypted, a process that has potential problems. When it comes to depositing source code into escrow, low tech is better than high tech.

In the vast majority of cases, the supplier or user is in the best position to verify source code. However, sometimes they wish to delegate that responsibility to the escrow agent, and can do so with the appropriate language in the escrow agreement.

Updates are made by replacing a container rather than breaking the seal and replacing some or all the contents. Often suppliers will keep three or four of the latest releases under escrow simultaneously because some of their users have not yet installed the most current release.

A good method is to require the supplier to either refresh the escrow contents semi annually or submit a written statement to the escrow agent stating that the software product has not been updated during that time. If the supplier does neither, then the escrow agent must report that fact to the user.

As a minimum, our standard Multi User Plan escrow requires that the user must receive an annual activity report.

We would not recommend any of the former Eastern Block countries because of the weakness of their intellectual property laws and general commercial instability, but otherwise there is not a great deal of difference among industrialized western countries.

Some believe that it is important to have the software stored in the their home legal jurisdiction so that quick access can be had if needed. However, except under extraordinary circumstances, an escrow does not trigger a release of source code at the first maintenance service hiccup; it is designed to move at a more measured pace, usually following a supplier's complete failure.

Our clients are situated on five continents and have been served by us from three location for more than twenty five years.

We store source materials in bank vault safety deposit boxes located around the world. They are constructed of metal and we add a Faraday Shield liner to the box for even greater protection against corruption by magnetic fields.

Using bank vaults means that we have a virtually unlimited number of storage sites allowing for much greater flexibility in meeting the needs of our clients. Besides, we think it is imprudent to store a large quantity of valuable software under one roof.

The major world class banks used by us have been in the vault business for centuries - nobody does it better.

Under a SUP, ISP and MSP both the supplier and user define the events; typically those include bankruptcy or cessation of business of the supplier, but a wider list can be named. Under a MUP, triggering events are defined by the supplier alone.

First the supplier is notified that a demand for release has been made (stating reasons why) and a short time is allowed for a response. If the supplier does not dispute the demand within the time allowed the escrow agent is required to deliver the software immediately.

If the supplier replies with a dispute, the matter is referred to an arbitrator or a court whose ruling is carried out by the escrow agent.

Typically source code may be used only for self maintenance, or maintenance of the true end user in the case of resellers. All of the restrictions on use contained in the original license should still apply. Financial investors who back development of a product often acquire outright ownership of the software being held in escrow as colateral security.

Attention should also be paid to the user's right to modify the software to accommodate the needs of new development. Copyright law in some countries prohibits modifications unless that right is clearly stated in the agreement.

Yes, and there is no reason to levy an additional charge. Under a MUP agreement, the supplier can designate users to have escrow rights in only that software for which they have a license.

Under a SUP or ISP agreement the escrowed copy of source code belongs to a single user, and there should be no charge levied for obtaining those materials.

Under a MUP and a MSP agreement a single copy of escrow materials must be shared by many users. In that case, reproduction costs are passed through.

A software escrow is mostly used to protect trade secrets, but it can also protect copyright as a side effect. When the ownership of a copyright falls into dispute, one of the legal questions that comes up is "Who first created the software?". Under those circumstances, having a dated and sealed copy of the software provides a very useful piece of evidence in establishing a claim of first creation. Click here to find out more about Copyright Protection

Under a SUP, ISP and MSP agreement, the parties decide. Under a MUP agreement, the supplier pays the annual fee and can charge users to be designated as a beneficiary.

Size is irrelevant. Several financial institutions have attempted to enter the field but soon left because they discovered that a software escrow is substantially different from a financial escrow. Some have even gone bankrupt, proving that bigness is no guarantee of stability. On the other hand some large institutions provide excellent software escrow services.

The most important considerations by far are the length and quality of an escrow agent's track record.

We were incorporated in 1974 and were the first in the world to offer comprehensive commercial source code escrow services. We grew out of the law practice of one of the world's first computer lawyers.

Our client list of thousands of companies around the world contains scores of Fortune 500 companies, government agencies at all levels, major banks, institutions and software suppliers large and small. Testimonials

As a result of our beginnings and a long history of excellent service, we understand the nature of software escrow intimately - and because it is our only business, we tend it very carefully. Corporate History

If you would like one of our experienced software escrow trust officers to contact you, leave us a note at desk@softescrow.com.

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