How To Negotiate Royalty Agreements

Once you`ve signed a license agreement, it`s difficult, if not impossible, to go back and try to renegotiate a higher royalty. The best way to avoid these three big mistakes is to do some homework. Find out the industry licensing fees for your IP type. Be sure to use a payment formula based on a minimum percentage or a fixed amount. If your know-how is crucial to your intellectual property, make sure its „value“ is part of the royalty negotiation. For a licensor, alternatives may be the decision to manufacture the product in their own home or not to enter the market. BATNA will tend to determine the degree to which a licensor or licensee is willing to tolerate a higher or lower minimum royalty or guarantee within a standard maturity range. A licensee may require it to pay the same royalty and/or royalty as another licensee who pays the least for the same licence. This may be limited, for example, to the same royalty, but not to prior royalties or the value that IP cross licenses bring to a transaction. In general, it is very difficult to know if one party has a better deal than another, unless it is a direct money deal. 2.) Avoid conditions that include royalties based on net profit. Royalties should always be deducted from gross profit and not from net profit. There are opportunities for companies to hide net profits to look less air than they actually are.

For example, they can claim that production and large reductions on products resulted in a very low net profit for the year. It is a shady practice, but one that is considered done. In order to protect their licence payments, licensors should always negotiate terms that subtract royalties from gross profit, which corresponds to the profit generated before deduction of overheads. It is also possible that the parties may agree on one or both caps and/or minimum licence fees and that these agreements could use the royalty payment period as a means of achieving the desired outcome. The term of a fee may be reduced or extended on the basis of the amount of licence payments received during the agreed periods. A licence issuer could propose that if the investor receives X-multiple costs during a period Y, the royalty will be reduced by Z years or extended by several years if licence payments do not reach an agreed cumulative amount. 4.) Finally, avoid license limits. Licence caps are caps for royalties. When a company reaches a certain level of turnover, it no longer has to pay royalties.

This practice, sometimes implemented in exchange for a negotiated minimum income, is the best thing to avoid. Royalties must always be paid for all sales. The minimum guarantees are generally between 25% and 40% of the fees for each region. This percentage is considered large enough to put „teeth“ in the contract, whereas, in the most conservative scenario, it is low enough to allow the licensee to honor or exceed the sale of the covered product necessary to generate enough license payments to cover the minimum guarantees. As these are binding financial commitments, it is essential that both the licensor and the licensee consider that the minimum guarantees are fair and achievable. To learn more, check out my guide. Don`t be surprised if they also ask you for your intellectual property fairly quickly. If you have filed a preliminary patent application, your answer is simple. Tell them that your patent concept is filed. At this point, you may want to see your provisional patent application, which is not a problem.

Perhaps, however, you would like to ask them to sign a confidentiality agreement, as you share confidential information with them. It is very likely that they will not sign yours and that they will offer their own. There is nothing to complain about, but be sure to examine your document very closely. Confidentiality agreements are drafted in such a way as to protect both parties – what is called a mutual confidentiality agreement – or only one. If something doesn`t seem right, talk to a patent attorney or licensed attorney….