The Reality of Licensing Royalties
What are realistic expectations when it comes to licensing royalties? I know that I have talked about this before but it is time to do a reminder about what is realistic in this economy.
I recently “fired” a client because he had expectations that were beyond reasonable. We had a firm licensing offer: a royalty offer of 5% for the life of the patent. Unfortunately, the client believed that he should have been offered a $2.5 million buyout. When you get a total clash of fantasy with fact, compromise isn’t going to happen.
Fantasy Versus Reality
No matter how great your product is, reality is that not every home in America is going to want one. Unless you invented the toilet, not EVERY home is going to have one of anything.
Try and keep in mind that a single product that you own the intellectual property (IP) on, is not a “company” with a book of business. So you can’t expect a pay out like you would get if you sold a business.
Expecting to be paid up front for your sweat equity is a thing of the past.
And while many inventions are good, most are not a game changer for the industry.
The Benefits of a Licensing Agreement
A licensing agreement is a way that you partner with the company that is going to manufacture, market and sell for you. In essence, you are sharing the risk with them. While a buyout does happen on rare occasions, you have to be objective about your invention and your expectations.
Here are some points to help determine royalty percentages:
- What market share do you have to date? This does NOT mean how much you fantasize about getting in the future. It means how many have you actually sold.
- How strong is your intellectual property?
- Is your invention a “game changer” for the industry?
- Can you cross into multiple industries?
A good licensing agreement is 5% to 7% (sometimes 10%) for the life of the patent. If your licensing royalties offered are less than 3%, you should figure out why. There are many companies out there that will charge you up front and pay a very low percentage.
There is a balance between being too greedy and being too desperate. If you want to get the best monetary compensation with licensing royalties, being educated on realistic expectations is paramount. Please check out my Inventor’s Galaxy Guide for more information.