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A Guide to IT Contracting by Michael R. Overly, Matthew A. Karlyn

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Source Code Escrow Agreements
CHECKLIST
What Type of Escrow?
Two Party
ree Party
Self-Escrow
Release Conditions
Insolvency of vendor
Filing of voluntary or involuntary bankruptcy proceedings that
remain undismissed
General assignment for the benet of creditors
Ceasing to provide support and maintenance services
Breach of the license agreement
Key Issues to be Addressed in Soware License
Requirement that source code be escrowed
Identify approved escrow agent
Denition of “source code”
Identify release conditions
Require vendor to update the source code to reect current ver-
sion of the soware
Identify all relevant fees and the responsible party
Include right to request verication services from the escrow
S Include cost shiing to vendor if verication fails
On the occurrence of a release condition, include right for cus-
tomer to use and modify the soware to provide its own support
262  •  A Guide to IT Contracting: Checklists, Tools, and Techniques
Techniques
In critical applications, include right for the customer to use a con-
sultant to verify the source code is well written and documented.
S Nondisclosure agreement with consultant
S Termination right for customer in the event of adverse
ndings
Consider requiring the vendor to deposit names and contact
information of key developers in the escrow.
Ensure the escrow company is well established and nancial
viable.
OVERVIEW
Whenever a customer enters into a license agreement for soware it takes
the risk that the vendor may go out of business, le bankruptcy, or, simply,
cease providing support. Depending on how critical the soware is to the
customer, these events could be catastrophic, stranding the customer with
a piece of soware for which it has no means of support. If the investment
in licensing the soware is substantial (e.g., hundreds of thousands or,
even, millions of dollars in fees, protracted implementation), the customer
must have some means of protecting itself. While conducting vendor due
diligence—particularly with regard to nancial wherewithal—is clearly
one of the most important protections, careful customers also generally
require the vendor to “escrow” the source code for its soware. In this
chapter we discuss what “escrowing” means, the types of escrow arrange-
ments, the real-world benets of escrowing, and common issues.
WHAT DOES IT MEAN TO ESCROW SOURCE CODE?
Almost all commercial soware is licensed so that the customer only
receives the object code version of the application. e object code is the
version of the soware that can be read and understood by a computer, but
not by humans. To modify the soware, x bugs, and otherwise maintain
and support the application, one must have the source code (i.e., the ver-
sion of the programming that can be understood and edited by humans).

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