Let’s Make a Deal

Key factors in a licensing agreement may vary in importance, depending on the inventor and situation

No one can claim definitively what should be the most important factor in a licensing agreement.

BY APRIL MITCHELL

I often get questions about licensing agreements, specifically the most important aspects of them. I have seen my fair share and know that no two are exactly alike.

There are some key factors I personally look for in a contract.  Though I may not always get all of them, I know that a perfect contract does exist because I have signed one (at least it was perfect in my eyes). 

Term sheet

This first step is a written document, usually with bullet points, that outlines the key terms and conditions of a deal between two parties. It summarizes the main points of the deal agreements and should be agreed upon before executing the legal agreements.

Certain stipulations typically addressed in a term sheet are a description of the intellectual property being licensed; scope of the license, including the territory, exclusivity and royalty rate (percentage of sales or a payment per unit); payment structure; warranties and representations; termination provisions to protect both sides, and the governing law and jurisdiction.

A term sheet can be created, or the parties can agree on these terms during a meeting or via email. Term sheet stipulations will be in the final licensing agreement.

You can find many templates for term sheets online.

The perfect situation

What would be the top factors in my perfect licensing agreement?

In no particular order:

  • A non-returnable advance against future royalties upon signing the contract;
  • A timeline for release of the product;
  • Minimum guarantees built in;
  • A marketing strategy.

In my experience, I want 2-4 of these factors. Getting all four is like winning a golden ticket for me—and should you be so lucky as to get all these factors in your licensing contract and can negotiate good terms within these factors, that is a fantastic win.

Some other factors also important to me in a licensing agreement that I’d like to have but don’t always get:

  • Having my name or company name or logo somewhere small on the box/packaging;
  • Getting a certain amount of free units of the product (usually 6-12, depending on the product);
  • The right to purchase the product at cost to give as gifts or to donate;
  • Being able to purchase at market value any IP gained by the company, such as trademarks or copyrights, after the contract has ended.

Again, these are great to have and a definite win. Most often, I find companies are very open to negotiating factors like this within the contract. 

The poll

In January, I took a poll on LinkedIn asking for people to weigh in on the most important part of the licensing agreement. I wanted to see where other inventors and product developers stood.

Fifty-three people participated. The four options were: an advance upon signing the agreement, timeline for product release, minimum guarantee, and other.

Forty-five percent deemed the minimum guarantee most important, followed by 34 percent for timeline for product release, 13 percent for an advance upon signing, and 8 percent for other. The comments section was also valuable to gain knowledge as to the reasoning behind some votes. 

As you can see, people value different things in a licensing agreement. So no one can claim definitively what should be the most important factor.

To sign or not to sign

Will I sign a contract if it does not have everything I’d like? Often, yes.

We have to give a little to get a little, and showing that I am a team player can go a long way. However, I believe it’s important to have at least a couple of my key factors in agreement for me to feel comfortable signing it.

I may settle for less in an agreement if I know it’s the last company looking at a particular product, just so it can make it to retail. Or maybe if I believe in what a company stands for and really would like to work with it—but it doesn’t have the funds or resources to do what other larger companies can.

If I started pitching the product to companies and was given an awful offer that a company was not budging on, I may not take it in hopes another company would be more reasonable.

If you are unsure about a contract or have not become comfortable reviewing and negotiating them, you may want to seek advice from a lawyer who specializes in licensing agreements.

Leave a Comment

Your email address will not be published. Required fields are marked *

Scroll to Top