Collaboration has become the new competition and whether you are looking to leverage someone else’s intellectual property or make more use of your own, licenses and partnerships can provide a great starting point.
Creating an effective partnership of any kind is truly part art, part science. While I always advocate getting professional help, I also think it’s important for every entrepreneur to still have a basic understanding of what you are getting into. Here are some common terms and features that you might see in your agreement.
Exclusivity: Whether you are giving someone permission to use an article you have written, a tradename that you own or access to a patent, you can do so on an exclusive or non-exclusive basis. Exclusive means that they are the only one with the permission or rights during the time frame of the agreement. Non-exclusive means that you can grant similar rights or permissions to other parties. The more exclusive the relationship, the more costly, obviously, since it keeps the other party from making additional relationships. Note that either the entire agreement can be exclusive or there can be a provision for exclusivity on some other metric (say geographical territory).
Upfront Payment, Back-end/royalties and Guarantees: There are different structures to getting paid under these types of agreements. If you have something very valuable to offer, you may require a fee upfront. For example, when I do a licensing deal with a company like Disney, they may require that the licensee pay a fee upfront for the ability to use their characters on their products.
Another payment mechanism is a fee based on the amount of product sold. This could be a dollar amount per item sold or a percentage of revenue or profits.
Finally, there is sometimes a guarantee (which may or may not be part of the upfront payment). This means that no matter how much the licensee sells, it owes the licensor at least a minimum amount.
There is no perfect formula here- these are all different aspects that are used against industry benchmarks to achieve realistic payment terms.
The one thing I will mention here is that if you are going to do a percentage amount, know that the higher up the income statement you are, the less opportunity there is for manipulation. This means that it’s harder to debate what revenue was received in a given period, while gross profit, operating profit or other income statement metrics have a bigger ability to be influenced (which could be good or bad, depending on which side of the agreement you are on).
Territory and Media: This is the area or channel where the rights under the partnership are granted. This could be a geographic area (you have rights in Europe, Missouri, St. Louis or even within 4 blocks of Main Street), a distribution channel (grocery stores, drug stores, mass market chains) or a medium (online, through television, film, etc.). The more territories or media included, the more valuable the agreement.
Term: Term is how long the agreement is good for. You want to have enough time to be able to execute on the agreement, but not necessarily have it hang out there forever, in case the other party doesn’t fulfill their obligations to your satisfaction. However, the party taking on the license will probably want the agreement to be renewable. This means that since they are investing time and money into the project, as long as they are doing a good job (such as meeting payment benchmarks, etc.) they have the opportunity to extend the license in the future.
Example: You grant rights to another company to exclusively distribute a library of your articles for two years online. If they do a good job and have invested in finding you lots of placements, they should have the opportunity to continue to represent you. However, if they aren’t pulling their weight after two years, you will want the opportunity to find a new partner or do it yourself.
Representations and Warranties: When you make any kind of an agreement, particularly a license or partnership agreement, each party will rely on information from the other party as being true. For example, if you are licensing your article, the other party will want to rely on you to confirm that your article doesn’t violate any copyrights. When you give a legal assurance like this, it is a representation and/or a warranty. If they turn out to not be true, the other party has legal recourse (aka can hold you liable) for “breaching” these representations or warranties.
There is more that goes into any of these agreements from approvals to audits, but this should give you a foundation to help talk intelligently with your advisors about the partnership or other arrangement that you are entering into.