This means that the code and key materials are deposited with a trusted third party, under an arrangement by which registered users can have access in the event of disaster striking the developer. The best organisations to perform this role are specialists, with facilities for both holding and releasing - rather than banks or usual deposit holders. Formal agreements are necessary to allow a user to have the benefit of escrow arrangements.

When users buy software they are usually buying the right to run that software but not to change the programs from which the software is created. They are merely buying a license to use the software (hence they are called the licensee) that is copyrighted and encrypted by the software developer to protect that copyright.
With regard to software houses and escrow a third party holds copies of the program source code. Copies of this source code become available to a maintained list of users under agreed circumstances. The source code when held with a third party is thus said to be in Escrow.

Escrow Role

Escrow plays a role in assuring software buyers that they can have access to the source code should the software developer not be able to make changes to the software in the event of eg. bankruptcy, liquidation of the owner, or Act of God. If the source code is released to a licensee, the owner never loses the intellectual property rights (copyright) of his software. The licensee(s) may only use the source code for their own maintenance purposes.

The source code of a software program is the detailed specification or "blueprint" of its creation, operation and functionality and without which a software programmer cannot readily understand the software for the purposes of modification, enhancement, "debugging", support or indeed, replication. The source code is not required for the normal commercial use of the program by an end-user.

The source code is therefore highly confidential and the owner of the copyright of the software will not wish to disclose the same to any end-user or distributor even though such parties will have entered into an agreement or licence with the software owner for use of the software.

However, if the software program is essential to an end-user or distributor's business, such end-user or distributor may require the software owner to arrange for the source code to be made available to them in the event that the software owner dies, goes out of business or is in material breach of its obligations to support and maintain the software to a proper operational standard.

Escrow Agent

Such an arrangement is now commonly made with an independent third party, an Escrow Agent, mutually agreeable to both parties who is contracted by the parties to hold the source code until such time as the parties' agreement or licence has expired or terminated or until the occurrence of certain specific events, usually the death, liquidation or material breach of the Software Owner, whereupon the Escrow Agent is authorised, upon certain conditions, to release the source code to the end-user or distributor, as the case may be.

Escrow Agreement

The purpose therefore of an Escrow Agreement is to provide for the terms of deposit of the source code and conditions of its release to the end-user or return to the Software Owner. The Escrow Agreement should provide for the Software Owner to keep up to date the code held by the Escrow Agent from time to time as and when changes are made and the software is debugged and enhanced.

A more complex form of agreement may also provide for the code held by the Escrow Agent to be periodically verified - this will of course be significantly more expensive to administer on an ongoing basis.

First, decide whether on Escrow Agreement is in fact necessary. Then, decide whether periodic verification will be required.
Decide whether the obligation to deposit is to relate to just the source code, or also to software listings, object code and all drawings and specifications which together describe every aspect of the software and step in its creation.
Decide also whether the items to be deposited are to be continually updated.
Decide who the Escrow Agent is to be and where/how the deposited code etc is actually to be kept
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In a typical Software Escrow Agreement ('SEA') the owner ('the Licensor') of the software provides a copy of the database content, website, instructions/ support manuals, other Intellectual Property ('IP'), source code (instructions/ statements written in eye-readable form in programmer's language and capable of being compiled into object code and an object code being a computer code that a computer can understand) to an escrow agent (a trusted third party, 'Third Party'). The agreement sets outs certain events under which the above can be released to a licensed user of the software ('the Licensee'). For example if the Licensor goes into bankruptcy or liquidation, a merger or acquisition takes place, or fails to properly maintain the software or perform under the Licence Agreement.
In today's day and age and due to the technological advancements in the IT industry more and more businesses are reliant upon third parties to supply bespoke software for their needs and to provide a maintenance service for the same. Such an agreement is therefore essential in order to protect the Licensee from such a risk. This can obviously assist the Licensor in marketing his product better.

Why should a typical Licensor consider placing source code in Escrow?

Placing source code in Escrow will help market the software and a Licensors' services better. The Licensee will gain confidence in the business and will feel safe in the knowledge that if one of the events discussed above occurs then he will be safe and business reduced.
The Licensee will be able to take the source code to any other software designer/ programmers and with this code they will be able to add and amend, fix, any issues and essentially have the Licensee up and running in little time, therefore ensuring continuity of business. Having said that software developers take pride in their ingenious work and invest a great deal in order to design something bespoke for a client and to gain the competitive edge of others in their field/ industry. It is therefore understandable that they will be reluctant to release the source code to a Licensee.

Other uses

If you are involved in the development/ licensing or simply use of software or other bespoke technology then you would need the protection afforded by the use of such an agreement. A Licensee should evaluate how critical the software, programme etc is to his business to put into context the importance of this agreement.
Typical clients that would want to utilise this service would include web designers and creatives, database administrators, software programmers etc. These clients are typically coming up with new ideas and they will want a way in which they can safely deposit and archive their work. Depositing their work will assist in the event that there is some copyright or ownership dispute.