The article below appeared in the May 2009 issue of Technology Transfer Tactics. Click here to subscribe.

Escrow services, a relative newcomer in targeting TTOs as potential customers, may offer an extra measure of security for your IP. Using these third-party companies to protect your valuable innovations may reassure potential licensees that their investment in your technology will not go up in smoke — literally.

An escrow service acts essentially as a security guard for your valuable intellectual property. Perhaps the most common arena for escrow in tech transfer is in information technology, where source code and software might reside only on an inventor’s computer, leaving it at risk of being wiped out in a fire, system crash, or other disaster.

“The use of escrow is growing. I’ve been at this for 10 years, but I got a call this morning from a technology company that never had to deal with this before,” says Jim Ford, founder and CEO of Guard-IT Corp., an Austin, Texas-based escrow service. “The licensees of any proprietary technology are catching on to this as a measure of security.”

In fact, many licensees are beginning to require an escrow arrangement in agreements. “A lot of people have been flying blind, but this becomes standard operating procedure when they understand the benefits,” Ford says. “Both the developer and licensee get an added level of intellectual property rights protection with an escrow agreement because we guard it as a third-party agent. We can also authenticate the ownership for the developer. But the big benefit comes from the licensee side. The same escrow agreement provides a contingent access agreement.” In other words, if anything happened to the technology housed onsite at your institution or even if the developer died, the licensee would still be able to access the technology.

The escrow agreement spells out the terms of a developer’s ownership, designation of clients, licensees, investors or other interested parties as beneficiaries. It also defines terms that would trigger the release or transfer of the escrow deposit materials to the beneficiary.

“Say a company licenses software or technology from a developer,” Ford says. “Typically the possession of the source code isn’t given directly to the licensee. It’s the bread and butter of the developer. But what happens if the developer goes out of business, leaves the university, or dies and there is no provision for access? Then the licensee can be left in a tremendous lurch when they are spending thousands to millions of dollars for the license.”

Like a prenup

The escrow works like a prenuptial agreement or a will. “If you’re sinking a lot of money into an invention and you don’t have a back-up plan, you are exposed to risk,” Ford says. “Fortunately it doesn’t happen often. But we’ve had situations where developers have disappeared, left the country leaving licensees hanging. We’ve had developers who have contacted us proactively saying they are declaring bankruptcy.”

There are several reasons why TTOs may find an escrow service useful:

Authentication of intellectual property. Short of filing patents or in conjunction with a patent program, this kind of service can act as an authentication service.

“If the intellectual property is held in escrow and authenticated by us, we are protecting the ownership for the university,” Ford tells TTT. “We know it’s very liquid. Technology comes in and out of the door in flash drives and back packs. If ever there was a dispute, we could help protect the university’s ownership interest.”

Third-party back-up. Rather than giving your institution’s IP directly to your client or licensee, an escrow service can retain it. “The licensees would have the security of knowing it’s all backed up with a third party,” he says.

Two-party assurance. Two-party escrow agreements provide inventors with an extra layer of intellectual property protection, control of the basic escrow terms, and the flexibility to add any number of beneficiaries to the agreement.

Three-party deals. Three-party escrow agreements are designed with specific terms and are static among the technology developer, a single beneficiary, and Guard-IT. This type of contract is typically requested or required by licensees who purchase technology from early-stage or small developers.

Double checking

In addition to secure storage, Guard-IT provides a deposit verification service that assures the escrow-deposited materials are complete, virus- and defect-free, and fully functional per the testing specifications.

In a Level 1 or “Fingerprint Verification,” files are checked for readability and scanned for viruses. The files are given a unique identification for internal benchmarking or comparison to subsequent deposit updates. Then the verification is reported to all parties.

A Level 2 verification involves recompiling the source code, if that’s what you’ve placed in escrow. This exercise insures the code can be rebuilt or recompiled into an executable program.

A relatively new service

When Ford started Guard-IT 10 years ago, there were only two to three established escrow players in the U.S., he says. That number has grown to half a dozen “viable players,” and up to 12 total in the U.S., Europe, and Canada.

And while Guard-IT provides services for many software makers, holding source codes and data, they work with just about any kind of invention, including drug and chemical formulas, business plans, proprietary databases, schematics, drawings, designs, and even construction blueprints.

One of the most valuable aspects of Guard-IT’s services is that everything can take place online. “There’s a vault link on our website,” Ford says. “We use a secure server for the transfer of deposited materials. When a client sends an update, the folder is automatically encrypted with a 24-bit key so it’s useless until we download it. We then decrypt, burn to CD or DVD, and put it in our vault. There’s nothing to hack into. Our vaults are first-class bank-grade security in Toronto and Austin. Access is limited to me and one or two attorneys who are company directors.”

In the event that Ford and those attorneys should die or become incapacitated, the company has yet another contingency plan. The escrow agreements can easily be transferred from agent to agent. “A few years ago we bought a competitor and we rolled those over with a simple affidavit that the client signs off on,” he says.

Clients can go online to Guard-IT’s website to set up an escrow, request a two-party or three-party draft, add a beneficiary, FTP an update, and make payments.

“Everything can be done online,” Ford says. “They don’t have to wait on us.”

Universities with multiple inventions to be escrowed can do so in a consolidated fashion. “We created the online arena to manage and keep tabs on all of those agreements. If a technology transfer office puts a catalog of intellectual property online, they would have a secure ID and password to keep tabs on the latest updates and have access to actual documents.”

Guard-IT’s services for a three-party agreement are $2,000 for the first year and then $1,500 for each subsequent year. That includes unlimited updates. But when there are multiple inventions to consolidate in a deal, Ford negotiates bulk rates.

A best practice

Even if your institution isn’t ready to seek escrow services, more and more licensees are requiring it. “I have developers call me every week who say, ‘I’ve never had to deal with this before but I have a deal on the table with a Fortune 500 company that wants me to put this in escrow,’” he says. “It’s a best practice; it just makes good business sense to lock up your valuable intellectual property.”

Joy Saunders, marketing director for MortgageFlex Systems Inc., of Jacksonville, FL, says her company works with large banks that have to meet certain standards. “We are a software development company, providing lending software to mortgage companies,” she says. “If we have a client with a requirement to escrow source code, this acts as a protectant to them if something happens to us. Once we have the software developed for them, we escrow the programing code. They have an up-to-date copy somewhere other than here at our office, which guarantees them access if something happens to us. We make copies and send it over securely to Guard-IT. Whenever there are changes to our code, which happens at least quarterly, the updated copies are sent to Guard-IT. It’s a very easy process.”

Ron Jennings, CFO for Austin, TX-based software developer QuickArrow, has been using Guard-IT services since the escrow service was launched a decade ago. In the early days, as a venture-backed company, using an escrow service was vital to the company’s survival.

“We were a new venture-backed software company building our client and revenue base, living off our investor’s cash,” Jennings says. “Lots of venture-backed companies don’t have a long-term lifespan, so our clients requested an escrow service. The customers sometimes would say they need some assurances that we can use your software if you can no longer support it. So we would escrow at their request, to mitigate the risk.”

Now that QuickArrow is profitable, the company typically is not required to use escrow. But Jennings does find that larger companies — including their largest client, Symantec — still require the assurance provided by the third-party service.

Contact Ford at 512-282-1995 or jford@guard-it.com.