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What are the pros and cons of different software escrow payment models?

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Software escrow is a service that protects both software developers and software users in case of disputes, bankruptcy, or other risks that may affect the availability or functionality of the software. Software escrow involves a third-party agent that holds a copy of the source code, documentation, and other materials related to the software in a secure location, and releases them to the user under certain conditions specified in a contract. Software escrow can be a valuable tool for software licensing, but it also comes with some costs and fees that both parties should consider before signing an agreement. In this article, we will explore the pros and cons of different software escrow payment models and how they affect the budget, cash flow, and incentives of the software developer and user.

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Wayne Scott

Regulatory Compliance Solutions Lead @Escode (an NCC Group company) | Global Financial Services Regulations -…
Dave Beaudoin

Group Product Manager, Luthier, Game Designer

1 One-time fee

The one-time fee model is a simple and common payment model for software escrow services. The software developer pays a lump sum to the escrow agent for setting up the account, depositing the materials, and verifying their completeness and accuracy. The software user does not pay anything to the escrow agent, but may pay a higher license fee to cover the cost. This model has the advantage of being straightforward and predictable, but it also has some drawbacks. It does not cover any updates or changes to the software materials that may occur over time, which could require additional fees or contracts. Additionally, it may create a disincentive for the software developer to maintain or improve the software since they have already paid for the escrow service. Furthermore, it may not reflect the value or complexity of the software since it is based on a fixed amount rather than a percentage or tiered structure.

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Wayne Scott

Regulatory Compliance Solutions Lead @Escode (an NCC Group company) | Global Financial Services Regulations - Resilience - Non-cyber risk - stressed exit planning
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To be open one-time, annual and hybrid fees all have their benefits and draw backs. As long as the value of the escrow solution is understood across the organisation, the risks are understood and owned at board level, the internal policies are kept up to date, the standards are written properly and the procedures are followed correctly.......then payment doesn't really affect the validity of the escrow solution.

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2 Annual fee

The annual fee model is a common software escrow payment model, wherein the software developer pays a recurring fee to the escrow agent every year for maintaining the account, storing the materials, and performing periodic verifications. The software user may also pay a recurring fee to the escrow agent or to the software developer for accessing the materials in case of a release event. This payment model is flexible, scalable, and aligned with the software lifecycle; however, it may create cash flow problems for the software developer, especially if they have multiple escrow accounts or if the fee is high relative to their revenue. Additionally, it may create a conflict of interest for the escrow agent and not provide enough security or assurance for the user, who may have to pay extra fees or face delays or disputes to access the materials in case of a release event.

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3 Hybrid fee

A third option for software escrow payment model is the hybrid fee, which involves a combination of a one-time fee and an annual fee paid to the escrow agent by the software developer, as well as a one-time or annual fee paid to either the escrow agent or the software developer by the software user. This model has the advantage of being customizable, adaptable, and balanced for both parties; however, it can also lead to confusion or complexity, a mismatch between expectations and realities, or insufficient value or quality for either party. Negotiating and monitoring multiple fees and contracts may be necessary to ensure that both parties are receiving what they deserve.

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Dave Beaudoin

Group Product Manager, Luthier, Game Designer
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When dealing with cloud software or services, the escrow picture can become even more complex. Not only should escrow considerations include the code under escrow itself, but how that code is run in the provider environment. For example, if you were to obtain the code for a cloud service but lacked the documentation or additional resources to stand up the full tech stack to support it, there may be some unforeseen complications when trying to maintain business continuity. This is why, in a modern cloud services model, it's important to have both a plan for data and business continuity of which software escrow is one of several critical components.

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What are the pros and cons of different software escrow payment models?

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1 One-time fee

2 Annual fee

3 Hybrid fee

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