Businesses Built On Custom Software Need This

I was looking over a software escrow agreement recently, and it hit me just how important these agreements are for any business that depends on custom software.

It’s not something people talk about a lot, but it’s a key protection for your business.

Let me break down why having a software escrow agreement is so important.

The Risk of Relying on Custom Software

Imagine this - your entire business runs on a custom software solution. It’s what keeps everything going.

Now, think about what would happen if your software provider suddenly went out of business or decided to stop supporting your software.

Without access to the source code, your whole operation could be at risk.

This is where a software escrow agreement can be a lifesaver.

Common Mistakes and Why They’re Risky

A lot of businesses try to handle this risk with what seem like good solutions, but these can fall short.

Here’s what usually happens and why these approaches might not work:

1) Trusting That Your Provider Will Stay Stable

It’s easy to believe that your software provider is solid and won’t go under.

But even stable companies can face unexpected problems—like bankruptcy or changing their focus—which could leave you without support.

If this happens and you don’t have an escrow agreement, you might lose access to the software that’s important to your business.

For example, if your provider decides to stop supporting your software, you could be stuck without a way to keep it running.

2) Thinking Your Contract Has You Covered

Some businesses think their software contract will protect them if the provider stops supporting the software or goes out of business.

Standard contracts usually don’t guarantee you’ll get access to the source code if things go wrong.

They might include terms for ending the contract, but they rarely cover what happens if the provider shuts down.

Without a software escrow agreement, you could end up with software you can’t use or fix.

3) Relying on Regular Backups

Many businesses believe regular backups are enough to protect them.

Backups are great for saving your data, but they won’t give you the source code you need to keep the software running if your provider goes out of business.

Without the source code, you can’t bring in another developer to maintain the software.

And your backups might be useless if the software itself isn’t working.

4) Not Getting the Details Right in the Escrow Agreement

Some businesses sign an escrow agreement but don’t make sure it covers everything they need.

Like when the source code will be released or how they can use it.

If the escrow agreement isn’t detailed enough, you might not get the source code when you need it.

For example, if the agreement doesn’t say that the code should be released if the provider goes bankrupt, you could still be left with nothing.

Plus, if the agreement doesn’t specify how you can use the code, you might face legal issues or other problems that stop you from using the software as needed.

What To Do Instead

To avoid getting caught off guard, it’s important to have a strong software escrow agreement in place.

Here's What I Suggest

1) Be Clear About What’s Being Deposited

Make sure the escrow agreement lists exactly what’s being stored with the escrow agent.

This should include the full source code, all necessary documentation, and any tools or components needed to keep the software running.

That way, when the code is released, you have everything you need to maintain the software.

2) Set Clear Conditions for Releasing the Code

The agreement should clearly state the situations in which the source code will be released to you.

This could include the provider going bankrupt, stopping support, or breaking the contract.

With clear conditions, you can ensure there’s no confusion and that you can access the code when you need it.

3) Explain How You Can Use the Code

The agreement should also explain what you’re allowed to do with the source code once it’s released.

This might include rules about not reselling the code or only using it for certain purposes.

Clear usage rights protect both you and the provider, ensuring you can legally maintain the software.

4) Include Terms for Ending the Agreement

Make sure the agreement includes clear rules for how it can be ended and what happens to the deposited code if that happens.

This way, you won’t lose access to the code if the escrow agreement ends unexpectedly.

5) Protect Intellectual Property

The agreement should include clauses that protect intellectual property rights.

This ensures that the provider’s rights are respected while giving you the ability to use the software as needed.

Final Takeaway

If you want to keep your business running smoothly, especially if it relies on software, then this agreement is important.

So don't overlook it.

Make sure your escrow agreement is clear, detailed, and designed to meet your needs.

By doing this, you’re protecting your business against the unexpected.

And you also make sure you have the tools you need to keep things moving, no matter what happens.

In short: Always be prepared for the worst, so you can keep your business running no matter what comes your way.

There's 3 Ways I Can Help You

Whenever you are ready, there are 3 ways that I can help you:

1) Book a 1:1 Call - In just 30 minutes, I’ll share strategies to help you mitigate risks with contracts, like clients demanding extra work or partners stealing your ideas. These insights come from 5 years of running my legal firm and handling 400+ projects.

2) Business Protection 101 - I have an email Newsletter where I post weekly, sometimes 2 times and other times 4. But these are all real lessons on how to protect your business. Focused on IT, SaaS, and Fintech. Learn from other people's mistakes. Join 120+ business owners here.

3) Short Contracts to Upsell IT Services - I created this guide to help IT agency owners, developers, and web designers craft short, flexible contracts that open the door to upselling more services. Learn how to boost client satisfaction while increasing your revenue.

Have a good day!

-- Akhil Mishra