When I opened my email a few weeks ago on a Saturday morning, I came across a panicky message from one of my inventRight students asking me to review his licensing agreement. It was truly amazing — the most thorough I’ve ever read, even! It had everything in it. He hadn’t missed a thing. It was, in short, a fantastic agreement. It was also completely clear his attorney had written it. It was perfect because it was so completely one-sided in favor of the inventor. No licensee would ever sign that, I told him and his coach. Yes, he admitted — his attorney had written it. And sure enough, not a week later, he told me the deal was off. His licensee was out. The moral? Bringing in a licensing attorney too early can kill a deal.
Time is of the essence, I told him. Pick up the phone. Tell them you jumped the gun. Tell them you truly want to work together — that you’re excited about working together. Say: “We can get this done.” Partnerships are two-way streets. It’s important you know what your licensee needs to be successful. My advice? Always start with a term sheet. That’s traditionally how it’s done. Work out some issues on the phone. Have a friendly conversation. At this point, I told him, he needed to focus on rebuilding trust. And quickly, because a trade show is impending.
Term sheets address big-picture issues. Can you and the company that likes your product work together? You’re figuring that out. You’re dating. So focus just on the following questions at first.
1. Does the licensee need an exclusive?
2. What about territories? United States? Canada? Worldwide?
3. For how long?
4. At what royalty rate?
Actually ask your licensee, “What do you need to make this work?”
Design your term sheet so you’re in agreement. Then, have your licensee draft a contract based on those terms.
Why is it better to have your licensee author the agreement and not your attorney? For one, it’s expensive. When they start to spend money you know they’re serious. And truly, it’s imperative you know what they need to be successful. You already know what you need. When they draw up the agreement, they show their hand, and I like that. Knowledge is power.
That said, expect to receive a boilerplate agreement. It will look ugly; they all do. Breathe. With a little bit of time and the right strategy, you can get the deal done. Don’t rush the process. The longer it takes, the more they invest. It becomes more difficult for them to pull out.
The way I see it, licensing agreements are twofold. What I’ve found works for me is negotiating money issues like royalty rates, improvements clauses, and minimum guarantees. Then, just before I’m ready to sign, I bring in a licensing attorney to review the contract and ensure I haven’t missed anything. You need to take charge of the business elements of the agreement; it’s not as if you hired your attorney for his business acumen. Please note: Your licensing agreement should not be signed in your name. If you haven’t already created a business entity, now is the time.
My advice? Always wait to discuss minimum guarantees. In my opinion, they’re the most important clause in a licensing agreement. It’s simple. If the licensee want to keep the rights to your idea, they must sell a certain amount of the product. If you give them an exclusive without setting any minimum guarantees, essentially they’ll own your idea even if they don’t sell anything. That’s a problem! Of course, no one likes to have a gun to his head. You need to approach guarantees delicately, which is why I would never bring them up when establishing a term sheet. Later on, they’ll be easier to introduce — I mean, let’s be real, they make sense.
A deal is never really over, I explained to my student. I negotiate licensing contracts week in and week out. Trust me: If you adopt the right attitude, you can get it back on track. I’ve seen it happen time and time again. But you really do need to have realistic expectations and to want a partnership. Hold on to your sense of humor!
Originally published on Inc.com April 7th 2016.
