My last post Navigating Your Licensing Agreement to Success was, …. well a success. It seems many readers liked the post. So, I decided to add a Part II to the post.
In that post, I mentioned that many inventors get ‘greedy’ when they are on the cusp of successfully licensing their invention – then blow the deal. I mentioned that the independent inventor typically has very little leverage and runs much risk if he or she asks for big or unexpected changes to the deal (the best surprise is no surprise).
I think I may have left the impression, though, that the inventor has no options to ask for edits or changes to the proposed licensing deal. That is simply not true, but the inventor must tread with caution.
Strategize, Prioritize, and Compromise
It is wise to have developed a ‘game plan’ before you begin negotiating a licensing agreement.
First, invest in your education of licensing agreements by reading two very helpful books:
Both books are updated frequently and both have examples of typical licensing agreement codicils. these books explain the structure of a typical licensing deal, with suggestions on items that are non-negotiable, as well as where you have some give-and-take.
Next, it is important to strategize and prioritize. What is really important to you in your licensing agreement?
The royalty rate – the percent paid to the inventor based on net sales – is obviously a key focus of every inventor. If an invention is very successful, even a 0.5% higher royalty might provide a significantly higher income for the inventor. But, the royalty rate is a dual edged sword, ask for too much and risk losing the deal; ask for too little and leave too much money ‘on the table.’ There is no a magically correct royalty rate, they tend to run from 2% to as high as perhaps 7% in most cases – but, every product and every circumstance is unique.
Perhaps you might request a 6% royalty rate, when you would be happy if they paid at least 5%. Then, if they respond with a counter-offer of 5%, you can accept it, demonstrating your willingness to compromise (from their perspective). But, what If, instead, they counter with only 4%, what can you do? You might ask why they can only offer 4% – that you had expected it might be a bit higher than that. Then, listen to their reason. The reason will tell you a lot and they virtually always have a logical, defensible reason for the rate they offer. Once they have given their answer, it is unwise to push back and still ask for more as it will make you seem like someone who will be difficult to deal with.
Licensing agreements have a provision for an MAR – or minimum annual royalty rate. This is just what it sounds like: it guarantees the inventor will be paid at least the minimum total in one calendar year, regardless of sales volume. Asking for a very high MAR is a risky policy for the inventor, because it suggests she doesn’t trust the licensee to deliver solid sales. On the other hand, to ask for too little, say only $10,000, means the licensee risks very little if they ‘sit’ on the deal.
To quote Kenny Rogers, “you’ve got to know when to hold ’em, know when to fold ’em!”