Software escrow means deposit of the source code of the software into an account held by a third party escrow agent. Escrow is typically requested by a party licensing software (the "licensee"), to ensure maintenance of the software. The software source code is released to the licensee if the licensor files for bankruptcy or otherwise fails to maintain and update the software as promised in the software license agreement.

What Is Software Source Code?

Source code is the software's programming code translated into machine-readable form, zeros and ones, which humans cannot understand. The form of the code which humans write and understand is called object code, which, when compiled is source code.

Picking an Escrow Agent

Either the licensor or licensee should pick an escrow agent. Generally, the licensor should pick and pay for the agent so that the owner of the software has the choice of which third party will be responsible for storing and handling the source code. Additionally, the licensor often will have more than one licensee requesting escrow and having the same agent each time makes the record keeping and contract negotiation much simpler. Often, licensees will allow the licensor to pick the agent if the licensor also pays the escrow fees.

When picking an agent, be sure to investigate the background and financial status of the company. An agent with no assets and without substantial insurance coverage is not a good choice. The agent should have substantial resources in the event of its negligence and ensuing litigation, or in the event of loss of the code and financial reimbursement by their insurance company.

Costs of Software Escrow

Software escrow fees are typically between $1000 and $2000 per year per licensee. There is some variation based on different pricing structures. Some companies will reduce the rates for licensors who have substantial numbers of licensee deposits.

Escrow Agreement

The software escrow agreement is a three party contract governing the procedures and terms of the escrow process between the licensor, licensee and agent. Usually, the software license agreement will contain a clause stating that the parties agree to escrow and will execute a separate agreement to cover those terms.

As this agreement involves three parties, the negotiations can be more difficult than usual. Whichever party is picking and paying the agent should negotiate its terms with the agent prior to bringing the third party into the negotiations. This will save time in that two of the three parties will already have agreed on the contract wording prior to the third party reviewing the agreement