Mitigating Risk in Tech Investments with Software Escrow

In the world of technology investments, risk is inevitable. However, it can still be proactively managed. Software Escrow is a third-party risk mitigation tool that known for safeguarding critical software applications and supporting business continuity. Beyond this, Software Escrow can also be utilised for protecting investments.

Revisiting the Basics of Software Escrow

Are you new to the concept of Software Escrow? Check out our blog – “A Beginner’s Guide to Software Escrow”.

Essentially, Software Escrow involves a legal agreement being made between three parties, these being: the software supplier (also known as the vendor), the licensee (e.g., an investor), and a neutral third-party Escrow provider, such as SES Secure.

The agreement requires the vendor to deposit source code, documentation, and other critical assets with the Escrow agent. At SES, these materials are then tested and verified to ensure that they’re accurate, reliable, and up to date.

These materials are to only be released to the investor if a predefined condition has been met. These conditions, known as trigger conditions or release conditions, often comprise of situations such as a vendor going out business or failing to maintain their service.

Why Should Investors Care About Software Escrow?

Investors in tech companies, especially those investing in start-ups or SaaS providers are exposed to a unique variety of risks. This includes:

• Vendor failure or bankruptcy.
• Loss of access to mission-critical software.
• Inability to maintain or update a product.
• Disruption to business operations – this would impact customer service, revenue streams, and reputations.
• Software escrow directly addresses these concerns by ensuring that the investor (or the company they’ve invested in) can continue to operate even if the vendor fails.

Software Escrow for investors directly addresses these risks by ensuring that an investor can continue its operations, even when faced with vendor failure.

Reducing Operational Risk With Investor Escrow

Example Scenario:

An investor invests in a start-up company whose core product is a proprietary software platform. If a situation were to arise in which the supplier of the software was to fail or cease their operations, the software would become unusable and inaccessible. This would be a wide-scale problem impacting many stakeholders.

Now, if the investor has a Software Escrow Solution in place, the software platform’s source code and relevant documentation would be released, enabling the investor to:

• Access, operate, and maintain the software platform independently.
• Have the time needed to hire new developers to continue product evolution.
• Ensure continuity for customers and partners.

The operational safety net that’s offered by Software Escrow is especially important for mission-critical applications i.e., applications that companies rely on heavily.

Reducing Financial Risk With Investor Escrow

From a financial stance, Software Escrow protects the value of investments. For example, if a company’s product faces operational problems due to vendor issues, its valuation can be impacted significantly. Software addresses this risk through:

• Maintaining business continuity - Escrow ensures that a service remains functional and monetizable, even when a disruption event occurs.
• Exit potential - this can make a company more attractive in M&A scenarios.
• Investor confidence – through having a Software Escrow strategy in place, founders can demonstrate their prioritisation of risk management.

Best Practices for Investors

To maximise the benefits of the Software Escrow model, investors should:

• Begin conversations around Escrow during due diligence, especially for early-stage or single-product companies.
• Ensure that all key assets are stored in Escrow e.g., source code, build instructions, third-party dependencies, and documentation.
• Define clear release conditions that are enforceable and aligned with business needs.
• Frequently verify the Escrow contents to ensure they are up to date and complete.

Working with SES Secure

For over 25 years, we’ve been crafting Software Escrow and SaaS Escrow Solutions for clients across all industries and sectors. As the complexity of the tech landscape continues to become more and more complex and cloud-dependent, the role of Software Escrow is becoming increasingly vital.

We understand the multiple aspects that are involved in the effective protection of an investment. To speak to a member of our team, please get in touch.

Did you know? Next month, our team will be attending Climb25! This exciting event brings together start-ups, scaleups, SMEs, investors, and industry leaders to spark innovation, collaboration, and investment.