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May 22, 2007 08:04 AM

Categories: Operations and Legal

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HSE

Member
Joined: 04/27/2007

Occassionally we receive the request to place our source code in escrow for a new client who is purchasing our software system. Is there a general rule of thumb when determining what to charge that client for this extra service? We are charged $500 for the initial deposit and $100 per deposit update by our software escrow agent. Should we simply charge this back to the client? Any thoughts or experience you have on this issue will be much appreciated.

Discussion:    Add a Comment | Comments 1-18 of 18 | Latest Comment

May 22, 2007 10:27 AM

As a condition for sale, you can consider the sale as your incentive for placing the software in escrow. They are only paying you all that money, because you put the software in escrow.

Why is this the only customer that requires that the software be placed in escrow? People post questions here asking about escrow enough, so many customers must be asking for it.

Consider escrow a normal operational process and don't charge anyone. Eat the cost. Put it in your marcom and tell the world that your software is in escrow.

May 22, 2007 10:35 AM

Thanks, Dave. I would say about 30% of our clients have requested this. Historically I have not charged the client for placing the software in escrow, but lately I have been asked (by non-clients) why we don't charge, as if charging was pretty typical.

May 22, 2007 12:14 PM

Consider it a marketing expense driven by market requirements.

May 22, 2007 12:33 PM

If you scroll down, you will see similar threads on the subject.

Marlon

May 22, 2007 1:51 PM

HSE:

I respectfully disagree with David.

I believe that the cost of set-up and ongoing maintenance of a source code escrow agreement should always be viewed as an "extra" to the contract for which the licensee pays all fees. This should not be a part of your normal overhead.

I also believe that you should pass through the cost of the escrow service, so that there is no or very little mark-up.

I have counseled my clients per the foregoing for years, and we have experienced an extremely high rate of acceptance by licensees (mid 90% or thereabouts). My clients bear the cost of escrows only in exceptional cases.

It's your money.

Chip

Disclaimer: my comments on this forum are for informational purposes only; they do not constitute legal advice, and should not be construed as such.

May 22, 2007 3:44 PM

Isn't it all a question of proportion? If you sell your product for $100 license fee, then escrow charges may make sense, otoh, if you have 6-7 digit deals for eneterprise software it becomes a different story.

May 22, 2007 5:23 PM

For relatively small transactions, my recommendation would be that there would be no escrow agreement under any circumstances. There is significant liability associated with escrow agreements, not to mention the litigation cost and risk associated with a possible unintended release of source code by the escrow holder.

For relatively large transactions, my recommendations are:

1. do not incorporate an escrow clause into your "standard" agreement (to do so would support the licensee's claim that the ISV should pay for the set-up and ongoing costs); and

2. add one only based on specific requests, but stick to your guns regarding the point that it is an extra, that the licensee should pay, and the cost is merely a pass-through.

If the licensee wants it, the licensee should pay for it.

Chip

Disclaimer: my comments on this forum are for informational purposes only; they do not constitute legal advice, and should not be construed as such.

May 22, 2007 5:38 PM

I agree with Chip. It's a special request. I would pass the cost of escrow through at the price that you're paying but I would also attach the administrative billable time to keep it all up to date and to make it happen.

A prospective client should be able to ask for this as an additional service and it should always be available to purchase as a service.

Lisa

May 23, 2007 8:50 AM

There is significant liability associated with escrow agreements
What's more, I have been asking this informal survey question for years and have never received a positive reply: does anyone know of a situation in which escrow actually "worked"? A vendor went out of business, the customer got the source from escrow, and was able to successfully take over the maintenance in a timely fashion?

(Yes, I know, not relevant to your question. The customer wants something, give it to him. And yes, the customer pays for it -- one way or the other. Whether it's an explicit charge is a detail of negotiation.)

May 23, 2007 10:15 AM

In response to Charles' question, I am not aware of any situation where a software vendor went out of business, or otherwise triggered a source code escrow release provision, and the source code was released as required.

I'm sure there have been some acutal cases, however. The best source would be an escrow company (e.g. Iron Mountain).

Chip

May 30, 2007 4:51 PM

FWIW, Iron Mountain declined to answer.

June 8, 2007 10:55 PM

We had the first request for escrowing our source code last month. The compromise agreed upon was a cost sharing approach; the customer agreed to pay the escrow setup and monthly cost and we agreed to the software packaging administrative expenses. I believe that our willingness to meet the customer in the middle helped make this a palatable solution. Having our source code in escrow provides us on an ongoing sales tool for gaining other customers that see source code escrow as a necessity and removes a potential barrier.

June 9, 2007 5:04 PM

As you can perhaps infer, I am not a big escrow fan, but one benefit for the software company, and by implication for your customers, is that escrow provides off-site source code backup that could be beneficial in the event of a disaster.

July 9, 2007 5:34 PM

Hi All,

Another way we use Escrow is as a risk reduction tool, in the sales process. Obviously, we're not going to offer Escrow to everyone we engage, since even if they pay for it, it's a hassle to get involved in. However, because we're small and still growing, we do get comments about how we represent a perceived risk to some enterprises (especially the bigger ones we deal with). As a result, we'll use Escrow as one of multiple tools we can use to help reduce that perceived risk.

However, I find it very interesting that while many people talk about wanting Escrow, none have formally pulled the trigger and asked for it to happen. It always seems like something people want to discuss, up front, but never actually implement, on the back end of the deal. It's almost like they just want to hear that you're willing to take that step for them.

My Best,

Frank Guerino, CEO
TraverseIT
Frank.Guerino@TraverseIT.com
http://www.TraverseIT.com

August 12, 2007 9:01 AM

As you can perhaps infer, I am not a big escrow fan, but one benefit for the software company, and by implication for your customers, is that escrow provides off-site source code backup that could be beneficial in the event of a disaster.


I suppose that's a benefit, but any good company should already be storing off-site backups of all their valuable information, not just source code. There are many backup solutions/services that make it easy to automate this process. What we do in addition is pay $10/month for a safe deposit box at a bank, and I drop a CD with our backups there once every month.

October 10, 2008 2:14 PM

In response to Charles' question, there have been many cases where a developer has gone bankrupt, (or unfortunately passed away), or failed to maintain the License Agreement which triggered a release and the Beneficiary was able to continue maintenance. Many times there are a group of Beneficiaries that group together afterwards and either maintain the software themselves, hire a programmer to do it, or even hire one/several of the original programmers of the now defunct company.

In this turbulent time of the economy, I imagine that this unfortunate event will happen more and more frequently, which is why it is even more important for Licensees to protect themselves through due diligence and best practices ie. they need to make sure the Permitted Use License is granted in the escrow Agreement. If the Beneficiaries recieve a release of the escrow materials but only have an object code license, the trustee of the Bankrupt developer could claim that they are misusing the software.
This article http://escrowtech.com/article.php explains in great detail more of these issues to keep in mind.

Justin's solution above is practical for the intended purpose, although you could easily set up an IP Archive for about the same price, and FTP the materials every month instead going throught the hassle of going to bank. Description here http://escrowtech.com/ip_archive.php.

Logan Smith
www.escrowtech.com

October 10, 2008 3:48 PM

Thanks! GREAT overview article. Highly recommended to any entrepreneur or attorney with an involvement in or curiosity about escrow.

there have been many cases where a developer has gone bankrupt, (or unfortunately passed away), or failed to maintain the License Agreement which triggered a release and the Beneficiary was able to continue maintenance
Can you provide a citation?

October 13, 2008 1:43 PM

Charles: Glad to hear the article helped. Because of NDA's with our clients, I cannot disclose actual company names that have been involved in a release, but I can provide the following regarding a citation for a case in which a release occurred.

The author of the above article, Jon Christiansen, is one of the founders of TechLaw Ventures, Utah¬?s leading high technology law firm. Previously, he was the chair of the technology and intellectual property sections of Utah¬?s two largest law firms. Mr. Christiansen is also one of the founders of EscrowTech, a software and technology escrow company with offices in the United States and India. Mr. Christiansen recounts the following experience.

¬?One of my most satisfying memories from the practice of law involved my representation many years ago of a large healthcare organization in connection with the licensing of important software from a software company. A little more than a year into the license, the software company fell into bankruptcy and from that time forward my client¬?s interactions with the software company were with a very hostile trustee. Fortunately, my client had access to the source code independent of the software company (and the trustee) and was entitled and able to retrieve the source code and use the source code to maintain and update the licensed software. For many years that client thanked me for having had the ¬?foresight¬? to negotiate for these source code rights in the license agreement. Actually, I was just a young attorney following a checklist I read in a formbook on software licensing that suggested the use of a source code escrow. I had never heard of the concept of a source code escrow before. I confess that I made many of the mistakes discussed later in this presentation and at best I created a ¬?pseudo escrow.¬? Nonetheless and more to the point, it still worked and my client not only found the source code useful, but believed that it ¬?saved¬? the organization from a disaster. Having had this experience and others, I strongly believe in the usefulness of a software escrow."

Hopefully this helps. If you have further questions, feel free to contact me or Jon through www.escrowtech.com or logan@escrowtech.com.

Logan Smith
www.escrowtech.com

Discussion:    Add a Comment | Back to Top | Comments 1-18 of 18 | Latest Comment

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