What is Source Code Escrow?

Source code escrow is a mechanism for making sure software source code will be available to a licensee in the event of a serious problem, usually bankruptcy, for the licensor, while protecting the licensor's business interests. The source code is stored with a third party who keeps it safe until it is required. This allows people purchasing software licenses to rest assured that the source code will be available, while allowing licensors to make sure that proprietary information is kept secure, rather than being released to the public.

When companies order custom software for business applications, the software company usually develops the product and delivers a packaged, finished product with a license to use it. The company also provides support, maintenance, and updates to the customer. The concern for customers licensing expensive and custom-developed products is that if the licensor of the product goes out of business, files for bankruptcy, or experiences continuity problems, they may not be able to adequately maintain the software. Having access to the source code would eliminate this problem, but it would compromise the business interests of the licensor. Source code escrow is a solution to this problem.

The third party holding the source code secures it and agrees to release it in specific and clearly defined situations. People with access to the source code through source code escrow can only use it in very limited ways. They cannot release information about it, for example, and cannot sell it to another party. This protects the licensor, as source code is proprietary and may contain critical information a software company uses to maintain an edge in the market.

The source code escrow is structured into the initial contract signed by both parties when the software company is contracted to develop or customize a product. The contract can include a variety of terms, and it is advisable to review them with care, checking for any obvious problems that might develop in the future. If the terms of release from escrow are too limited, for instance, a licensee may find itself in need of source code and unable to access it because the escrow company cannot release it.

Source code escrow is not always needed. Companies considering it as part of a contract may want to consult legal authorities and other people in the industry to decide if it's needed and how it should be structured. There may be more suitable alternatives in some cases that will meet the needs of both parties.