How Software Escrow can help businesses as the risk of insolvencies grows

As UK and worldwide economic turmoil hits, stats taken from The Insolvency Service, which are published by the UK government on a quarterly basis, show that insolvency has increased for businesses in computer programming, consultancy and related activities as well as information service activities. Statistics show that in the first half of 2022 insolvencies in this business category amounted to a total of 462, compared to 289 insolvencies in the first half of 2021 and 265 insolvencies in first half of 2020. This equates to a 74% increase.  

A similar situation is also happening to businesses around the world. According to a recent article published by ABL Advisor, it reported that bankruptcy filings in the US during August 2022 increased by 10% year on year, with more insolvencies sadly expected to come in the coming months.

As economic uncertainty and insolvency of IT related businesses continue to rise in the UK and across the globe, Escrow London are experiencing both an increase in companies triggering their software escrow agreements due to a software vendor insolvency and companies wanting to invest in Software Escrow Agreements.

What is Software Escrow? 

Software Escrow Agreements are set up to provide comfort to the end user that if the software developer is unable or unwilling to support the software, the source code and other deposit materials can be released to them. By having access to the deposit materials, the end user can then continue to maintain the software without the involvement of the developer. Release conditions outlined in a Software Escrow Agreement usually include the following and may be negotiated between the parties: 

• Insolvency – The state of being unable to pay debts. 

• Bankruptcy – Declared in law as unable to pay debts. 

• Discontinuing support or service of the software application. 

• Failure to support the product that is licensed to the Beneficiary and then failing to cure such a material breach within 10 days of notice. 

• Transfer of IP rights to a third party who does not provide the same level of protection provided for in the escrow agreement.

Different types of Software Escrow Agreements 

A range of Software Escrow Agreements to suit every type of licencing contract are available on the market today. The most common ones include: 

• SaaS Escrow – This Software Escrow Agreement is used when the application is a SaaS hosted in AWS, Microsoft Azure, Google Cloud, or data centre. This agreement protects both the cloud environment and the customer data.

• Single Beneficiary Source Code Escrow Agreement – This Software Escrow Agreement is made up of the depositor, beneficiary and software escrow vendor as the independent third party. A software escrow agreement of this type is usually used when a client is licencing software from a developer.

• Multi Beneficiary Source Code Escrow Agreement – Multi Beneficiary Agreements are used by a developer to provide comfort to their clients that they have a standing Software Escrow Agreement in place. By having this type of agreement in place, under a single agreement, the developer is able to add an unlimited number of beneficiaries to the master agreement.

• Data Holding Agreements – Data Holding Agreements are used when a company is using a developer to create a bespoke application and the beneficiary owns the intellectual property. This type of agreement provides protection for the customer that in the event of a dispute with the developer mid project, another developer will then have the source code to continue the project and prevent serious delays. 

In these uncertain times, if you ever have doubts about your critical software vendor not being financially stable, worry they may discontinue the service and support or breach their maintenance or support obligations, then using a software escrow vendor would help mitigate these risks.

This blog was originally written by Evan Lever, CEO, Escrow London