Congratulations! A company wants to license your idea. That’s fantastic. You are one step closer to living the licensing lifestyle.
Don’t get too excited though, because you’re not done yet. There are so many issues that need to be worked out. And in reality, any of them are capable of derailing the negotiation process.
First, understand that signing a licensing agreement is going to take longer than you think it should (and want it to). Be patient. Second, repeat the following as if it were a mantra: If an agreement is too one-sided, it won’t work out in the long run. Negotiating is like dating. Good communication is required. Both parties must establish what they are and are not willing to compromise on, which takes time and concerted effort. Prepare to give in on some issues and stand firm on others.
You are not going to get everything you want out of a licensing contract, but you need to walk away having won the terms that are the most important to you. If you can’t, you may need to walk away from the deal–just like people end relationships that seemed so promising.
That having been said, I want to alert you to the most common reasons licensing agreements fail. Hiring a licensing attorney you trust will help you avoid these unfortunate instances.
1. The agreement fails to establish a performance clause or minimum guarantees. Let’s say you license your innovation to a company that ends up not doing anything with it. If your contract includes a minimum guarantee and/or a performance clause, you’ll still be getting paid. If your contract doesn’t include a performance clause or minimum guarantees, you’re out of luck, because you can no longer offer a different licensee an exclusive. Your hands are tied. Most companies do not enjoy committing to a minimum guarantee. My advice is to ask for a low one starting out. You’re acknowledging that it will take time for sales to ramp up during that first year, which the company will appreciate.
2. The company missed its sales cycle. Industries that are seasonal follow a strict product development timetable in particular. If that window passes, you are going to have to wait another year. To be honest, there aren’t any silver bullets to guarantee that this doesn’t happen. My advice is to be as much of a project manager as is appropriate. Some companies like to work with inventors; others won’t want to have anything to do with you. Get a copy of the company’s schedule and help it hit important deadlines. Provide input and assistance without becoming a pest.
3. The contract lacks an improvements clause. Let’s say the company makes modest changes, improvements, and/or additions to your idea–which is normal. If for some reason the agreement is dissolved and the rights to your idea are returned to you, you will not be able to license those improvements to another company (without paying your former licensee a royalty). In other words, if you don’t include an improvements clause, you no longer own the rights to the innovation in its entirety. So suffice it to say that improvement clauses are very important. Unsurprisingly, companies don’t like to offer these either. This is a term that I wait to bring up until we’re almost done negotiating, and both parties are looking forward to the process coming to a close.
4. The company doesn’t pay you the minimum guarantee you are owed. This happens more than you might think. Before you have your attorney fire off a letter stating that your contact has been breached and that you are pulling out, try to understand what the issues are. Be flexible. In my experience, good things can come out of a breach of contract. I’ve used a breach to ask for something else, because I’m in a better place to negotiate. I have leverage. And frankly, readjusting the guarantees you agreed on may ultimately be better for you than trying to license the product all over again.
5. The contract specifies that a certain form of intellectual property must be obtained and/or the contract stipulates that it only applies to specific intellectual property. In my opinion, a fair contract will allow you to continue filing intellectual property and will apply to all future intellectual property as well. Tying your contract to one patent in particular is too risky. If improvements are made, you will want to own them, and you are going to do that by filing more IP.
6. The product doesn’t sell. This may or may not be anyone’s fault, per se, but it is important that you try to understand what the issues are. Maybe the packaging was terrible, maybe the sales department didn’t properly market the product, or maybe the market itself changed direction. This is another reason why minimum guarantees are helpful. If the company can’t pay you–or chooses not to–you will be able to regain control of your idea. You may be able to include a stipulation in your contract that you get to review final mockups.
7. The contract doesn’t have an audit clause. An audit clause, in my experience, is part of the boilerplate section of a licensing contract. This clause establishes that you have the right to hire an independent auditor to check your licensee’s records. I have never personally felt the need to audit a company, but if you believe revenue is being under-reported (and therefore your royalties are lower than they should be), this clause will help you obtain some relief. I’m not sure how you would without it.
8. The company doesn’t have any, or sufficient, product liability insurance. Accidents happen and unfortunately lawsuits frequently follow. Your licensee needs to maintain sufficient product liability insurance and your contract needs to clearly state that you are not liable. Your licensing attorney will be able to determine whether or not you are protected and if you need your own policy. Ask your potential licensee to include your name on its policy. On that note, you should never sign a licensing agreement in your own name–by that point, you will need to have established a company.
Needless to say, some contracts are better than others. As I said earlier, don’t obsess over getting everything you want. You won’t. And please, don’t forget that agreements are living, breathing documents! Nothing ends just because you’ve signed a contract.
Originally published on Inc.com January 29th 2015.
