Escrow Agreement: why it is beneficial to your business
Our previous blog post dealt with the notion of Escrow. Placing assets in escrow (“Escrow”) means entrusting the asset with a third-party who undertakes to safekeep and release it to another party upon the occurrence of a pre-defined event. A person or entity (“Digital Asset Owner”) places the asset, or a copy thereof, in trust with a third-party (“Escrow Agent”) who holds this for the Digital Asset Owner until another person or entity (“Beneficiary”) obtains access to the asset if certain conditions, agreed in advance, are met.
Entering into an Escrow agreement aims at ensuring the continuity of business for the beneficiary. This is the common incentive among most beneficiaires for entering into an Escrow agreement, despite the type of beneficiary. The Escrow also benefits the digital asset owner for different reasons.
An Escrow agreeement will protect a wide range of beneficiaries, from traditionnal licencees to potential buyers, and digital asset owners.
The different types of beneficiaires
Various uses can be made of Escrow depending on the type of beneficiary.
Beneficiaries may take the following forms:
➢ A licensee of the Digital Asset owner. Digital Assets are essential components of a company's business that either use them or obtain licenses for their use from the owner. However, if the owner goes bankrupt or fails to provide the agreed service, the licensee may find itself in dire straits and not able to continue its own activities. Having the asset placed in Escrow enables the licensee to continue using the asset in order to maintain its business activities.
➢ A distributor or publisher of Digital Assets. When the owner of a Digital Asset enters into a distribution agreement with an important distributor, such distributor may be reassured if the Digital Asset is placed in Escrow so that it can continue to manage the distribution of the Digital Asset in compliance with the distribution agreement if the Digital Asset Owner were to file for bankruptcy or fail to provide the agreed service.
➢ The potential buyer of Digital Assets from its owners. Until the acquisition transaction is finalized, it is risky for a company to disclose the contents of the Digital Assets. By placing the Digital Assets in Escrow, the buyer is able to ascertain that they will in fact be provided once payment for the transaction has been completed, and the seller need only disclose them to the buyer once the transaction is successful.
➢ Investors or banks. As Digital Assets become more liquid and valuation tools improve, creators of such assets may obtain investments or loans from investors or banks in order to build their assets and/or expand. These investors or banks may accept the Digital Asset as collateral (regulations around the world are evolving to take effective security over intangible assets) and want to use an Escrow to access such assets in the event that the creator of the asset goes bankrupt or disappears. The Escrow would act to complement the security that they might take in the Digital Asset. One can also imagine government programs that would promote new technology through loans and advances provided security and Escrow are put in place.
➢ Co-developers and co-owners (where several companies are involved in the development of a software). Where there are multiple owners of a creation/asset, including across multiple countries, being able to place the asset with an independent third-party Escrow ensures that any/all the co-owners can access the whole asset if certain pre-conditions are met.
➢ Licensees of multiple Digital Assets (or Private Equity that specialize in new technologies) can use the Escrow system to better manage their portfolio. Today most companies use multiple suppliers of Digital Assets. In order to effectively operate its business, for example, a company may depend on different pieces of software working together. Each piece of software may belong to different software providers. If any one of these providers went bankrupt, the whole business could come to a halt. As a result, a licensee of multiple software may want to have a centralized third-party system to ensure that these assets are protected. To achieve an efficient management of all these dependencies, an Escrow agreement, including all licensors of software to the Beneficiary, can be implemented.
➢ The owner of the asset itself. If the owner is a Company and its key employees are creating the Digital Asset, placing the asset in Escrow as it is created or updated, by automating deposits through integration with development platforms such as GitHub, GitLab, Visual Studio or Azure, ensures that a third-party Escrow Agent holds a version of the asset and if a key employee should leave or the owner disappear, the asset will be retrievable.
Benefits for digital asset owners
When setting up an Escrow, a person or entity protects their Digital Asset not just for the benefit of a potential Beneficiary but also for themselves. This is because placing a Digital Asset in Escrow offers the following inherent protections:
➢ The Escrow Agent provides a certification as to the date the asset is deposited with them. This is essential to claim copyright protection over such asset as it establishes a start date for the creation of the asset.
➢ Depositing an asset with an Escrow Agent benefits from a presumption of ownership, which makes it easier to prove ownership of such asset in the event of a dispute.
➢ The Escrow Agent stores in its vaults essential or valuable assets. This effectively constitutes a secure back up for the Digital Asset.
➢ With more and more contributors to the development of one Digital Asset, depositing new versions of the Digital Asset over time serves as a consolidator and a chronological marker for key development stages.
➢ Using a third-party Escrow Agent to check and control a deposited Digital Asset is a way to ensure that a company’s internal processes for developing and documenting an asset have been followed properly.
➢ Creations typically take time and are produced sometimes over long periods using various technological tools and platforms. Technologically savvy Escrow Agents can interface with such tools and platforms in order to seamlessly update the creation on a continuous-flow basis. This enhances the intellectual property protection for the work since it is registered as it is created and ensures automated back-ups.
➢ Placing a Digital Asset with an Escrow Agent as a matter of course (as the asset is being developed, such as by automated deposits through integration with software development platforms) enables the quick implementation of Escrow services.
➢ New users of Digital Asset placed under escrow, can, depending on the escrow contract, become beneficiaries without having to complete other formalities with the Escrow Agent.
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