Intellectual Property (Source Code) Held in Escrow

I work for a start-up company who has a client requesting that we place the source code for our SaaS (software-as-a-service) application in escrow. They're concerned that, as a start-up, the company may fold which will leave them in a position to scramble to replace the feature set that our software provides. As it is a niche application they feel they will be unlikely to find a suitable replacement.

This is one of our largest clients so we're eager to maintain a good relationship. The client has not invested in the company outside of its relationship to us as a customer. They do not own any shares in our company.

I'm personally tempted to take the position that this risk is inherent in doing business with any software company - and more so with SaaS providers. Of course, such a terse reply isn't likely to earn any points.

Has anyone ever run into something similar? What are some common routes to follow which may satisfy our client? I have, of course, recommended that our CEO and COO seek legal counsel on the matter before drafting any contracts which might result in the company's loss of IP.

Also please note that for the sake of this discussion we can ignore the obvious logistical issue of keeping source code up-to-date with an escrow provider.

This is not an uncommon request for companies in your position, for precisely the reasons you describe. Still, if you mishandle the escrow paperwork, especially the release conditions, you can effectively hamstring your company. I'd recommend consulting an attorney with experience with escrow agreements.

If you're going to try to do it yourself, then pick an escrow company that you've heard of, preferably an established player and not a little company that's beholden to your customer. Start with the escrow company's standard form paperwork and not what your customer serves up.

Try and limit what you deposit to an executable version of your code -- that will probably fail, and you'll probably end up escrowing your source code -- but those that don't ask don't get. Then try and limit the release conditions for the escrow -- since the only concern they've expressed is your bankruptcy, cross out everything else about "failure to support," etc. Then try and limit what your customer gets to do with the escrow materials after the release -- e.g., they only get a license for their internal use in furtherance of the license they already have; no rights for third parties, no right to sell, no ownership in the released materials, etc. Make sure there's some kind of process in there for disputing a release notice. The only thing you should even consider paying for is the escrow service -- if they want verification, etc., that should be on your customer's dime.

Good luck.

This is an increasingly more common request, especially for SaaS vendors such as yourself. We at EscrowTech International have developed a menu of offerings specifically for SaaS vendors that allow for customized solutions as mentioned in the posts above i.e. Release Conditions and limited use license. The most basic option is a traditional "storage" escrow which allows updates of the code along with user data (if required.) We also offer “Data Center” SaaS Escrow solutions which may include daily or weekly backups, “turnkey” solutions, or live “mirrored” back-up. These options along with SaaS escrow issues are covered in detail in the video presentation below on SaaS (cloud) Escrows http://escrowtech.com/video_saas.php.

EscrowTech has been in business for twenty years and services the majority of Fortune 500 companies. Feel free to contact us if you would like more information on a traditional SaaS Escrow or “Data Center” Escrow. Further details and options for SaaS Escrows can be found on the following page of EscrowTech’s website https://escrowtech.com/saas_escrow.php.

With the conventional client-server application the additional value of a source code escrow is clear, however there is very little benefit to SaaS users with the conventional arrangement. Saas users simply want to continue to work with the application and have access to their data - even when the SaaS supplier is in financial difficulties.

Internationally, there are a number of reputable escrow specialists that have invested in the development of proper solutions which take into account the completely different continuity issues which apply to SaaS. While the universal principle of installed software makes it possible to keep the Software Escrow process simple, continuity for hosted software requires a radically different approach.

Particularly in Europe, innovative escrow agents have implemented SaaS Escrow arrangements to suit the continuity needs of the SaaS end-user whilst at the same time protecting the interests of the SaaS supplier.

Suggest you research this (get a copy of a draft SaaS escrow Agreement) and then give this to your attorney or escrow agent to draft for your specific circumstances and legal jurisdiction.