In today’s market you may be able to get an edge over the competition if you can find a way to profit from your intellectual property or someone else’s through licenses and partnerships.
In a typical licensing agreement, the licensor grants the licensee the right to produce and sell goods, apply a brand name or trademark on merchandise, or use patented technology owned by the licensor. In return, the licensee agrees to certain conditions and makes payment to the licensor known as royalties.
Creating a successful partnership is a bit of an art, which is why I always recommend people work with a professional who knows how to leverage intellectual property.
The purpose of this article, however, is to help business owners understand the basics of partnerships, joint ventures, and licensing so they can ask the right questions to licensing pros and potential brand partners.
Are We Exclusive?
Exclusivity in agreements is extremely important because it’s a bargaining point for more money. In other words, the more exclusive the partnership, the more money at stake since exclusive agreements prevent the other party from working with anyone else in a similar arrangement.
If you enter an exclusive agreement, the parties specified in the agreement are the only ones with rights to the licensed intellectual property during the time frame of the agreement. But if the agreement is non-exclusive then the “grantor” can give similar rights or permissions to others.
Exclusivity applies to all licensing agreements, from an agreement to use written content like a blog post or article, to a brand name or patent.
Remember that you can negotiate for either the entire agreement to be exclusive or for just specific exclusivity provisions on things like geographical territory.
Ways to Get Paid
There are different structures for getting paid when licensing out your IP, depending largely on the industry, leverage, and aspects of the deal.
There’s typically an advance royalty, which is a flat fee paid upfront, and ongoing royalties, which are paid as a percentage of every sale (typically range from 6 to 10 percent).
Generally speaking the more value you’re offering the more leverage you have to ask for upfront payment. When I work on licensing deals where one party (the licensor) gives the other party (the licensee) the ability to use the licensor’s characters on products, for example, the more popular the characters are with the licensee’s target market the bigger the payment the licensor can ask for. This could be a dollar amount per item sold or a percentage of revenue or profits.
The advance royalty is basically a guarantee that the licensor will get some money regardless of how much the licensee sells. Then, if the product sells, the licensor will get an additional percentage of the sale. A guarantee could be part of the upfront payment or it could stand alone.
The Where & How
Your agreement should specify:
- The geographic area where the rights are granted, such as New York or California.
- The channels through which products will be distributed, such as grocery stores, drug stores, big commercial retailers, or boutiques.
- The media for advertising, such as online, television or film product placements.
Relationship Time Frame
The term is the length of the agreement. Licensees (the party who is receiving the rights) typically want the option of renewing the agreement after the term has ended. If the agreement is renewable, as long as the licensee is meeting all the requirements, the licensee can choose to extend the license.
Representations and Warranties
When negotiating and executing an agreement, each party relies on information from the other party and accepts it as true. That information is called “representations and warranties.” An example of a representation and/or a warranty is when you’re licensing your blog posts and you confirm that your blog posts don’t violate any copyrights.
If you make a false statement that is important to the agreement, then the other party can hold you liable for breaching your representations or warranties.
These are just the basics of licensing and brand partnerships/joint ventures. There are many more points that go into these agreements such as quality control provisions, advertising commitments and sales efforts, audit rights, notices and credits, and others. But this should give you a good starting point.
It’s always wise to get good legal advice if you’re unclear on any aspect of licensing. The professional help you get now can save you lots of money down the line, and, ideally, a good attorney should help you make money by setting you up for success with a licensing deal.