Beyond Bankruptcy: Comprehensive Release Conditions for an Effective Escrow Agreement by Jeff Meeter

As many businesses know, software escrow is a critical part of licensing mission-critical software applications. Software escrow and verification services can help protect your company's software investment, and serve as a best practice against business interruptions.

Escrowing the software source code with a trusted escrow agent such as Iron Mountain ensures that the source code will be stored and protected, and only released when it is needed. This enables the licensee to continue to have access to (and support) the software it paid for, even if something unexpected should happen to the developer.

But, how do you define something ?

If the developer is not able to support its product in the future whether due to a bankruptcy, merger, acquisition or new strategic partnership the software licensee contacts Iron Mountain to request a release. Iron Mountain then contacts the developer, and if the release conditions are satisfied, the source code is released.

However, these release conditions need to be spelled out in advance, because they are part of the legal contract between you and your software developer that is designed to protect your business.

Many people automatically think of bankruptcy as the primary escrow release condition and certainly, if your software developer goes bankrupt, you want to be protected. But according to Iron Mountain statistics, insolvency/bankruptcy is only the third most frequent reason for an escrow release. This may be due to the fact that it costs money to declare bankruptcy; so many floundering companies just cease operations.

Historically with Iron Mountain escrow customers, loss of support is the #1 reason for the release of source code (which comprises 30% of total releases), followed by cease of business operations with 22%. Insolvency and bankruptcy come in third with 20% of all releases.

The lesson is this: When it comes to negotiating the terms and conditions of your escrow agreement, we recommend that you seek legal counsel and make sure you include all relevant release conditions. These release conditions identify the circumstances that will allow for access to the source code, should support for the technology be interrupted.

As you consider your business' dependency on licensed software, are any of the following issues a concern?

Support issues such as failure to maintain, loss of support, or inadequate support

Vendor cease of business operations

Vendor bankruptcy

A merger and/or acquisition of the vendor company

The vendor's loss of personnel critical to providing support for the technology

Short product lifecycles

If so, these conditions and any others that may be a source of concern should be considered for inclusion in the escrow contract. Take the time to develop a custom-tailored agreement that fits your needs today, while also addressing anticipated future needs.

Beneficiaries must also consider how the materials will be released in the event that a release condition is met. Will the materials be released on demand? Or will a dispute resolution by a third party be required? Will the developer agree to an expedited release which allows for access to the source code immediately after the beneficiary has notified the escrow agent that a release condition has occurred? Again, this must all be negotiated in advance as part of your escrow contract.

Once your escrow contract is in place, how does a release work?

If you have software source code in escrow and a release condition occurs, you formally notify Iron Mountain by submitting a release work request. Iron Mountain then sends a copy of the request to the developer, giving them a set period of time to respond as defined in the escrow agreement. If the developer acknowledges that a release condition has occurred or does not respond by the deadline, Iron Mountain will release a copy of the deposited materials to you. This will then allow you to recreate your software application and continue using it.

In summary, the incorporation of comprehensive release conditions will ensure an effective escrow agreement, offering protection if the developer becomes unable or unwilling to provide the previously agreed-upon level of service. With these provisions in place, Iron Mountain can enable the licensee to take control of its own software and ensure that they're not left out in the cold.

LINK:	http://blog.ironmountain.com/2013/service-lines/technology-escrow/beyo...
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