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   Exclusive License Negotiations.  80:20 Rule?
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   Author  Topic: Exclusive License Negotiations.  80:20 Rule?  (Read 1298 times)


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Exclusive License Negotiations.  80:20 Rule?
« on: Dec 19th, 2007, 12:26pm »
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Hello All,
I am currently in negotiations with a patent holder for an exclusive license.  Below is the proposal I was given with regards to up-front & royalties.  Now, I'm clear on the up-front costs but am not so sure about the 80:20 rule mentioned.  Is this a valid rule of thumb to go by?  I'm trying to get a feel for what is fair.  I look forward to reading your feedback & opinions.  Thanks in advance!
Btw, I am posing these same questions to my patent attorney.  However, I'm having trouble getting her to call me back.
**  Start Proposal **
"First, John Doe would like to recoup the money ($7,500) he spent in acquiring his patent.  ... <snip> ... Thus, he would like $7,500 up-front money.
As to royalties, I have always followed the 80:20 rule of thumb.  No matter how you express royalties, it always is an allocation of profit.  The 80:20 rule of thumb gives you 80% of the profit.  However, since profit can be manipulated, the 20% profit to John is expressed as a percentage of revenue.  For many products, that works out to be around a royalty of 5% or 6%.  In your case, your business plan shows an unusually high gross profit (which is very good for you).  In the first year, you project $350K revenue with a gross margin of $250K.  20% of that margin is $50K.  That $50K represents about 14% royalty.
Again, you may think that a 14% royalty sounds high, but it actually results in 80% of the gross profit staying with you.  In later years when revenue and profit increases, 80% of the increased profit stays with you.  That sounds fair."
**  End Proposal **
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Re: Exclusive License Negotiations.  80:20 Ru
« Reply #1 on: Dec 19th, 2007, 5:08pm »
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I am not familiar with an "80 / 20 rule" in this context.  But then, I have not been directly involved with any license negotiations myself.  It doesn't sound too unreasonable to me (as a general rule) but I'd have to do math to verify that view.
In the licensing arena, there is a commonly stated 80 / 20 rule, but it simply states that 80% of a patent portfolio's value comes from 20% of its patents.
Perhaps someone else here will provide additional comment.  But when push comes to shove, this is a business decision on your end, and depends largely on what the license is worth to you (and/or your company), as well as what the licensor is willing to agree to.
« Last Edit: Dec 19th, 2007, 5:11pm by CriterionD » IP Logged
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Re: Exclusive License Negotiations.  80:20 Ru
« Reply #2 on: Dec 20th, 2007, 8:05am »
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The allocation of proceeds (i.e., the royalty) is strictly a business question.  Legally, there is no substantive difference between 80/20 and 1/99.  
- Jeff
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Intellectual Property and Technology Law
Brooklyn, USA
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