What are the two biggest mistakes you can make in a product licensing agreement when licensing your product idea? Read this article to make sure you don’t make them.
Over the years, I’ve licensed many ideas. Through inventRight, we’ve seen thousands of licensing agreements. I can tell you there are two major mistakes you do not want to make. These two aspects of a product licensing agreement are crucial to watch out for because if you don’t, it can be really painful. So, check out those mistakes.
Top 2 Mistakes to Avoid in Your Product Licensing Agreement
1. Missing Performance Clauses (Minimum Guarantees)
The first mistake is missing performance clauses, also known as minimum guarantees. This is a crucial part of your licensing agreement that ensures your licensee is actively selling your product. A minimum guarantee means they must sell a certain amount of your product to keep their licensing rights.
Why is this important?
Without a performance clause, they could hold onto the license without selling anything, which isn’t fair to you. If you give them an exclusive license without minimum guarantees, they could stop selling, and you wouldn’t be able to license your product to anyone else.
I like minimum guarantees attached to sales. This way, you can make sure they’re hitting the numbers you agreed upon and doing the work you need them to do. Without minimum guarantees, they don’t have to sell anything. So, number one, make sure your licensing agreements include minimum guarantees.
Here’s a pro tip: When you’re negotiating a license deal, make sure to ask the company what’s the minimum quantity they need to sell to keep the license, or how many sales they must make before returning the rights to you. Let them decide the number they’re comfortable with for this minimum guarantee.
Usually, this could be around 25% of sales, but it varies based on each situation. Negotiating minimum guarantees with the company can be a bit tricky. If you need assistance with this, feel free to reach out to us. It’s crucial to include these guarantees in your agreement so you can regain your rights if the company doesn’t meet their sales targets.
2. Restrictive Grant of License
One of the biggest mistakes in product licensing agreement is the overly restrictive grant of license. This part of agreement specifies what you’re licensing to the other party in exchange for royalties. Sometimes, these agreements insist that you must have a patent or specific patent claims. This can be problematic because it limits your ability to earn royalties, regardless of whether you ever receive a patent.
Contrary to what some patent attorneys might say, you don’t always need a patent to earn from your idea. You could leverage your knowledge, trade secrets, or even a provisional patent application or design patents. There are various ways to ensure you get paid. However, negotiating these terms can be tricky. If an agreement insists on a patent being issued before you earn, it could hinder your chances of getting paid promptly, which is something I want to help you avoid.
If you need help with this too, we’re experts in handling it. As I mentioned earlier, we’ve reviewed thousands of licensing agreements—more than possibly any other company worldwide. My goal is to ensure you get paid every time you have an idea, and I’m here to assist you with that. If you require assistance, please don’t hesitate to reach out.
Conclusion
These are two critical things you need to watch closely when signing a product licensing agreement. First, ensure there are minimum guarantees so that companies perform as promised. Second, be wary of the grant of license. If the agreement requires an issued patent, you’ll need help negotiating to avoid being tied down by intellectual property issues.
This can be tricky. I know many of you are reading and thinking, “Steve, I need a lot of help.” Whether you’re trying to pitch your ideas and not getting responses, or you’re unsure how to close a deal. It happens all the time. Maybe you just want the pros to handle it for you. That’s where our program, Gateway, comes in.
We’ll find the right companies and people, ensure your marketing material is spot on, and provide the right protection. We’ll get your idea to those companies and negotiate licensing agreements to make sure they’re fair and balanced. Gateway is designed to do all the work for you. With over 25 years in this business, we know how to find the right companies and give your idea the best chance of success.
