access to source code if the start up fails
I have begun developing packaged software for pharmaceutical manufacturers.
A BIG customer asked me "what if I install your software and your company is no more after 3 years?"
I am sure other packaged software companies go through this OR went through this.
What is the best way to mitigate this risk for the customer?
3 Answers
What you need is a software escrow service. You basically place your software package's source code with a neutral third party. This party will release the source code to your customer under certain specified conditions. (One example might be your company goes bankrupt.) There are hundreds of companies that provide this service. Here are just a few.
Iron Mountain Escrow Associates Escrow Tech International Typically you sign a contract that specifies under which conditions your software source code will be released to the other party. These services charge a fee. You typically have the big company, that is worried about what happens if you vanish, pay for the escrow fee. You also need a attorney to review this contract and you need to consider those legal fees as part of your bid to this company.
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+1. Every time we were faced with this we said "Of course! You find and pay for the escrow service and we're happy to send them a CD with all the code." BTW *every* time they ended up not bothering. It's absolutely normal to expect them to pay 100% of the fees *and* to find the service they want. Don't push back at all, just put the effort on them. – Jason 14 years ago
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I've worked with companies that only worked with software vendors that placed their source code in escrow. This is certainly better than selling your source code to your customers if you don't want to. – Joe A 14 years ago
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I have done exactly the same thing Jason mentioned. Put the ball in their court and they typcally fold. – Gary E 14 years ago
Gary has written about escrow, and that is the proper formal way to provide your customer access to your source. As a general rule though, source is next to useless to 95% of customers as there is a very small likelihood they will have the skillset or resources to deal with an issue in your code. Somehow it provides a level of piece of mind though.
However, depending on the nature of the customers' business and to an extent your relationship with them, you may like to consider giving them (or selling them) the source as part of the deal. This would be done under a tight agreement which requires them to keep it confidential and restricts their rights to using the code internally for the purposes which it was sold for, but this has the advantage that they can take a look at it from the start (if it's well organised, it boosts their confidence, etc), and you don't have the extra cost of escrow. I would recommend a policy that forbids them from changing the code and deploying it, as that would bring you a maintenance nightmare.
You would still need to provide them with updates to the source every time you ship a new release (as you would with escrow) but it's probably a bit more straightforward.
Of course, this is something you may not want to do if your source contains a lot of important proprietary secrets, or if you have something to hide in terms of code quality.
Finally, if the system has some sort of license key restriction, you may want to think twice about giving them that bit (although with the source they could work round it).
I have seen this approach work well under certain conditions so I thought it worth mentioning.
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You are completely right about source code being next to useless for 95% of your customers. In a previous consulting career I had to deliver complete source code to my clients. It is amazingly easy accidently to leave something out of that code, making it useless. I ended up buying a spare computer with nothing on it. I would install the "complete source code" package on the blank machine to see if I could recompile the code before sending the package off to the customer. – Gary E 14 years ago
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That's a good tip Gary - the top-of-the-line escrow services offer something they call 'verification' which is exactly this, building your product on a bare machine with just the source and your instructions. If you do end up offering source to customers, you could build the cost of helping the customer with that exercise into the fee. – Steve Wilkinson 14 years ago
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I like the idea of selling them the source in the first place. It's a way to get extra money today. – Jason 14 years ago
Companies fail all the time. Even doing business with larger companies, divisions close and product lines are often discontinued. There are no guarantees anyone, no matter how stable, will be in business with the same product three years from now.
You can be informal about it and tell them that should you go out of business you would be open to selling them the code. However, if they are a large firm an informal agreement may not be sufficient for them.
If this is big sale for you, you can include a right of first refusal and/or an option to buy in the contract. Typically this is done in conjunction with a software escrow service. Make sure you increase the sale price to account for this as this grants them a lien on your product.
