Source code escrow

Software businesses are often built around code the buyer or a key customer never actually sees during normal operations, which creates a risk if the vendor stops operating or stops supporting the product. Source code escrow addresses that by having the vendor deposit current source code with a neutral third-party escrow agent, who releases it only when an agreed trigger event happens.

When it comes up in a deal

• A buyer acquiring a software business may want to confirm existing escrow arrangements the target has with its own customers, since those obligations continue after closing.
• A buyer who is also a major customer of a software vendor being sold may want to negotiate its own escrow arrangement as part of the deal.
• Escrow deposits need to be kept current, so diligence often checks whether the deposited code actually matches what is in production.

Why it matters beyond the code itself

An escrow agreement is only useful if the deposit is complete, current and includes enough documentation to actually rebuild or maintain the software, so reviewing the escrow terms and deposit history is part of a thorough technical diligence process.