- Four Things to Include in Every Licensing Agreement - July 1, 2015
Licensing Agreements: Using factors that can work in your favor
Creating a licensing framework is a complex process because everyone involved wants to benefit from the arrangement. In my experience, you can best protect your intellectual property if you craft the agreement in such a way that you are paid a commensurate amount of money for your idea while establishing clear understandings about business terms such as exclusivity, geographic and vertical market restrictions and how your partners intend to produce and use the idea.
Basically, licensing is giving another company permission to produce and sell your product. You provide the idea, they provide the manpower. For small companies, licensing is a good way to stay focused on core competencies and generate a revenue stream without diverting attention toward building a sales network, distribution channels or manufacturing. In my business, licensing has allowed me to put measurement tools in places where they have never been before, and I’ve been able to do it faster and cheaper than if I had to do it on my own.
When creating the framework for a licensing agreement, the first thing is to be realistic about what your intellectual property is worth to the marketplace. A common mistake I’ve seen is that people tend to overvalue their ideas. While it’s natural to want a price based on what you think the idea is worth, the price tag also depends on what others think it’s worth. If the idea is something that partners or customers “must” have, then you’re in a stronger position to get premium pricing. For a company to consider an idea a “must” have it should do something cheaper, faster or better, or enable a larger system to operate. Think of this in terms of your car. You must have an engine in order to operate your car, so someone with an engine design can get a higher price for that design. Alternatively, electronically operated mirrors are something that are nice to have but do not impact the ability for you to drive the car. While it’s a convenient feature, this mirror design will not get has high a price as the engine design.
In addition to determining the fee, a solid licensing framework spells out how that fee will paid. In some cases, it makes sense to negotiate a lump sum for a predetermined amount of time. For example, I may ask for a flat fee of $5,000 per year or $500 per month. Other situations may call for a royalty, or payment per unit. In this case, I may be paid ten cents per unit. This is the most common type of deal. There are some instances where it makes sense to combine these options, such as an agreement to pay $10,000 per month or $1.00 per unit based on whichever value is greater.
Another thing to consider within the framework of your licensing agreement is exclusivity. When looking at this option, think about whether or not you would rather work with a single partner or multiple partners.
Other companies may want to be the one and only partner to manufacture and distribute your idea. In this type of worldwide exclusive agreement, you want to be sure that you are getting paid a higher fee for the loss of additional revenue streams, as well as put some performance checkpoints in place that will protect you if the partner does not live up to expectations.
When looking at exclusivity, you may also consider which markets will be included in the agreement. This can be broken down a few different ways. The first is geographic exclusivity. Essentially, you are granting a partner the right to produce and distribute your idea within specific states, regions or countries. I like these types of agreements because they provide multiple revenue streams and allow me to work with multiple partners.
You can also work on industry-specific or vertical exclusivity. In other words, the framework allows you to work with partners in various industries. A great example of this is what MarqMetrix is doing with its Performance Ball Probe. This state-of-the-art measurement tool is available to a wide range of industries, including food and agriculture, oil and gas and pharmaceuticals, and this broader range of partners has created multiple revenue streams.
In all agreements, you want to ensure the long-term protection of your intellectual property. One way to accomplish this is to spell out exactly how the technology or idea will be used by each partner. Will the idea be produced and integrated as a standard component of a larger system?
Adding performance checkpoints into the framework is another way to provide long-term protection for your idea. I like to add six month checkpoints into my agreements, as this provides an opportunity to evaluate sales performance and make any necessary modifications. It’s an added level of accountability for my partners and gives me a way to terminate agreements that are not working out as anticipated.
Creating a licensing agreement that works for you and your partners will require a great deal of thought and patience. You can expect to see numerous revisions before the final version is signed. However, being mindful of the factors that can work in your favor from the very beginning of the negotiation process will put you in a much better position to leverage and protect your intellectual property for many years to come.