A license agreement is meant to give both you and the licensing company legal protection. Below are some of the important and often negotiable points that you will usually find included in an agreement:

 

1. Royalties. Royalties are what you’ll be getting paid. They’re a percentage of the net selling price of each item sold, and they usually range from 3% to 10%. When you’re in the negotiation phase of your agreement, you should start high and expect them to come down a little. The agreement should state that you’ll get paid a royalty as long as the company is making and selling your idea or product. Make sure that your agreement includes royalties for any country they sell it in, even though you don’t have foreign patents. You also have the option to keep it US only (if you have other interest from licensees outside the U.S.). Also included will be the timing of your royalty payments. These are often paid quarterly, on or before the 15th of the month following the close of the preceding calendar quarter. The royalties should be accompanied by a report showing the number of products sold and the net selling price for each customer during the preceding quarter and the amount of royalty due. The licensee is expected to keep accurate and complete books, and you or a representative should be able to inspect the books relating to your product at suitable intervals after you give a reasonable notice that you want to do so.

 

2. Start date. You’ll want to be sure the agreement includes a reasonable date when the product will be ready to sell (you don’t want your darling brainchild sitting around on ice forever).

 

3. Minimums. This specifies the minimum number of your products that they must sell in the first year (and the amount of royalties that would generate)—or make up the difference in a dollar amount. In other words, if the royalties paid for any calendar year do not equal the minimum dollar amount, the licensee pays you the difference, usually no later than 30 days after the end of the calendar year. This guarantees performance on their part, since you don’t want someone licensing it and not producing any—especially since that would mean you’re stuck and can’t get out of the deal. You may increase the minimum as your product begins to sell over the years, so this number can be a sliding or adjustable one. Remember that the licensee is investing a lot in your product, so you don’t want to be too greedy. To arrive at a fair minimum, when you’re in the negotiation phase, ask how many they expect to sell in the first year and/or in which stores. If they tell you they’ll get it into ABC Store, as soon as you hang up, search online to see how many stores ABC has and base your minimum on the facts. For example, if ABC has 200 stores, and each store sells three of your products per week (a very conservative estimate), that translates to 31,200 units. If your royalty rate is 10% of a net selling price of $5, then your minimum would be $15,600.00. If they come up short, they’d have to pay you the difference in order to keep the agreement in force. 

 

4. Exclusive vs. Non-Exclusive. “Exclusive” means that they are the only company you are allowing to manufacture and sell your product. Non-exclusive means you can license it with other companies. Naturally most deals will be an exclusive. Keep in mind that you can specify what market or category they can sell it in. For example, if I licensed my mirror to a company that had absolutely no ties to automotive stores, I could state that in the agreement, and be free to also license it to a company that did have automotive ties. So be sure your licensee has ability and history in all the categories that apply.

 

 5. Term. This specifies how long the agreement is in force. Some inventors sign a two-year agreement and at the end of it they assess it for a longer term. Others keep it in force for as long as the products are being sold—or, if it’s patented, the agreement may expire when the patent does.

 

6. Modifications clause. This states that even if modifications or changes are made to your product, you’ll still get royalties. This is pretty crucial: you don’t want a company making a teeny tweak to your idea and then saying they don’t need to pay you because of the change. Also, you want to be sure that any improvements, modifications and substitutions during the term of the agreement will belong to you.

 

 7. Advance. This is an amount paid to you upon signing the agreement, and it’s usually deducted from future royalties. It’s not too common, so don’t be surprised if you don’t get offered one. While it would be nice to get an advance, it’s not a deal-breaker if you don’t.

 

 8. Liability policy. Suppose somebody loses an eye flipping the cap off your gizmo. They’ll sue. You want to be sure you’re covered by the licensee’s policy with a legitimate insurance carrier that’s acceptable to you, and that they’ll name you as one of the insured. Make sure the limit is high (for instance, some specify that the limit be no less than three million dollars).

 

 9. Performance. This is where they could list any tradeshows they will be attending, or other ways they will promote your product. It’s nice, for instance, to know that your licensee is going to showcase your product at an international trade show. But this clause is not that common, so it’s not a deal-breaker if it’s not included.

 

10. Quality. Be sure to specify that the quality of your product must meet an agreed upon design (this will protect you from a company producing your product shoddily).

 

11. Trademark rights. If you’ve already trademarked an aspect of your product, you’ll need to grant them the rights to use it, if they want to. They might even pay you money for it!

 

12. Patent. It is ideal for you to retain your patent even if they are paying the legal fees for it, so look very carefully at the language around patent ownership.

 

13. Indemnification. This should be included, but you may need your attorney to spell this out for you. It’s a good addition in any agreement that provides an extra layer of protection.

 

14. Termination Agreement. It’s a good idea for both parties to have an out, as long as you feel it’s fair to you. Have the attorney check the language.

 

 Once you understand all the terms, and if you like what you see in your agreement, ask your attorney to take a look at it.