What Is an Escrow Account? A Guide for Startups Doing Deals

Escrow is an arrangement where money or another asset is held by a third party and released when agreed conditions are met.

Lowdown

An escrow account holds money on behalf of those entitled to it. The escrow agreement sets out when and to whom the funds can be released.^[1]

A specialist escrow provider may be used. Solicitors may also hold transaction money in connection with legal services, but their client accounts cannot be used as general banking facilities.^[3]

Why It Matters

Escrow can reduce timing risk where one party does not want money released until agreed conditions have been met. HMRC guidance recognises escrow arrangements used to secure obligations in transactions.^[1]

Technology contracts may use source code escrow, where software code is held by an independent provider and released if specified events occur, such as the supplier becoming insolvent or failing to provide support.^[2]

The agreement should clearly state what is being held, when it can be released, who pays the fees and what happens if the parties disagree. For software escrow, consider how the code will be updated and checked to ensure it can be used if needed.

Our Conclusion

Escrow can help where payment or access to an important asset should depend on a defined event. Check the release rules, fees and dispute process before agreeing to it.

Sources

[1] HMRC, International Exchange of Information Manual: Escrow Accounts

[2] GOV.UK / Government Commercial Agency, Assessing and monitoring the Economic and Financial Standing of Suppliers: Escrow arrangements

[3] Solicitors Regulation Authority, Accounts Rules, rule 3.3 and Third-party managed accounts