A financial arrangement where a neutral third party holds funds, assets, or documents on behalf of two or more parties until agreed-upon conditions are met.
What is an Escrow?
Escrow is a safeguard mechanism used in various business, legal, and financial transactions to ensure that both parties fulfill their obligations before money or property changes hands. In an escrow arrangement, the parties agree on specific conditions—such as the completion of work, delivery of goods, transfer of ownership, or closing of a deal. A trusted third party (the escrow agent)—often a bank, attorney, or specialized escrow service—holds the funds, assets, or legal documents in a secure account until those conditions are satisfied.
Escrow is common in:
- Real estate transactions – The buyer’s payment is held in escrow until the seller delivers the property and all contract terms are met.
- Mergers & acquisitions – Part of the purchase price may be held in escrow to cover potential post-closing adjustments or liabilities.
- E-commerce or online marketplaces – Funds are kept in escrow until the buyer confirms receipt of goods or services.
- Intellectual property transfers – Code, trademarks, or patents may be held in escrow until payment and documentation are finalized.
The arrangement is almost always formalized through an escrow agreement, which is a legally binding contract signed by all parties involved, including the escrow agent. This document clearly spells out:
- The identities of all parties.
- What the escrow agent will hold (funds, property, documents, IP rights, etc.).
- The specific conditions that must be met before release.
- Instructions for handling disputes or non-performance.
- Fees for the escrow service and which party will pay them.
Once the agreement is signed, the escrow agent takes possession of the assets and follows the instructions to the letter—no funds or property are released until all conditions are met.
The main benefits of escrow are trust, security, and risk reduction. Neither party has to worry about paying or delivering first without assurance that the other will hold up their end of the deal. The escrow agent acts as a neutral enforcer of the agreement, only releasing funds or property once the predetermined terms are fulfilled.
For cross-border transactions—such as a non-U.S. founder purchasing U.S. assets or engaging in a large U.S. contract—escrow provides an added layer of protection by mitigating jurisdictional and enforcement risks.
