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JimIvey
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Re: Royalty Rates
« Reply #15 on: Aug 9th, 2004, 11:39am »
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I was hoping someone else here would have a better idea about this than me, since I know very little about licensing.  But I'll toss out a few parameters for your consideration.
 
First, I think typical royalty rates range about 1-5% of net sales.  Most license agreements give the licensor the right to inspect the accounting books of the licensee for verification of the appropriateness of royalty checks.  Breach of that provision (or any other material breach) terminates the license.  There are nasty people out there and you have to protect yourself.  One small caveat:  some people are beginning to question the appropriateness of those historical rates, so you might get some "push-back" on that issue.  And, there's a huge difference between the 1% and the 5% -- be ready to defend whatever rate you ask for with objective evidence of its value.
 
Of course, there are may other types of royalties, including up-front fees, fixed fees per month/year, etc.  If it's just a rate of net, they can get an exclusive license and then not use it until the patent expires, preventing a competitor from using it while paying no money.  Licenses frequently have "best efforts" clauses prohibiting sitting on the technology and minimum performance clauses for canceling the license if the licensee fails to adequately exploit the technology.
 
Then there's exclusivity.  Will you license it to one or to many?  Each will pay less for a non-exclusive license but you may make more in the aggregate -- then again, maybe not.  That's something you should consider.
 
And, exclusivity can be divided up into geographical regions and into different markets.  For example, are the three "bites" from different areas of the country?  If so, each can take an exclusive license for their respective territory.  One inventor had an invention for better labeling of products.  He divided his market place into categories like food, drinks, cleaning products, etc.  You can slice your market up in all sorts of ways and make each segment an exclusive right to sell.
 
Think about how much profit your invention will produce above and beyond the profit currently made in its various industries.  If you don't know that now, you need to figure it out.  Remember, you can't take all that extra profit -- it doesn't leave any incentive for the licensee to use your invention.  How much you can take and how much you can leave to your licensees is a point of negotiation.
 
Another point to consider is what a licensee will have to do in order to use your invention.  If it requires that they fundamentally change their business practices (e.g., dump production equipment that hasn't been fully depreciated yet), they won't want to use your invention.  You should study the way they do business and find a way to fit it into their business with as little inconvenience as possible.
 
Then, there's the whole issue of assignment (selling your patents outright rather than licensing).  Valuation takes the same calculus as described above but can't be divided geographically or otherwise and can't be non-exclusive.
 
I hope that helps you get started.
 
Regards.
 
P.S.  I recently learned that one of the thorny issues ever to infest licensing is the notion of open source software.  The various OS licenses limit the commercial value of any software sold/licensed -- unless you do it right.  If your invention pertains to software and you're including actual software with the patent(s), you will need an audit.  If you don't do it, they will.
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James D. Ivey
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Re: Royalty Rates
« Reply #16 on: Aug 9th, 2004, 12:41pm »
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Jim,
 
Thanks for your thoughtful reply.
 
This is the kind of info I have been seeking.  
 
Question; Is it better to:  
 
1.) Post price and terms that will then be countered and negotiated ?
 
-OR-
 
2.) Ask for an offer (without first stating my price and terms) that I can counter and negotiate ?
 
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JimIvey
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Re: Royalty Rates
« Reply #17 on: Aug 11th, 2004, 9:19am »
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Now you're asking about negotiating tactics.  There are many schools of thought there -- hard to say who's right or best.  One theory is that the first party to mention a number loses.
 
There's a pretty simple yet insightful book I read once on negotiating.  It's called "Getting to Yes."  I don't remember who wrote it.  It's a quick read and well worth it, in my opinion.
 
I hope that helps.
 
Regards.
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James D. Ivey
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mike
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Re: Royalty Rates
« Reply #18 on: Aug 11th, 2004, 1:46pm »
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Jim,
 
I now have a lawyer on retainer that will help me with contractual matter.
 
The 2 proposals that I have thus far received provide  reasonable starting points.  
 
Money matters aside, both documents lack the full compliment of protective conditions that I have found in license agreement examples that I have seen and further discussed with my lawyer.  
 
I am preparing review comment letters that I will send to these companies. Basically I will list the protective conditions that I would like added to the documents.
 
I will ask that they submit a re draft with the listed conditions included, and or reply in some manner to my concerns.
 
Anyway, I do not plan on using my lawyer on this first round draft review. Once (if) I get a response, I will take to my lawyer.
 
Thanks
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Harry
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Re: Royalty Rates
« Reply #19 on: May 6th, 2006, 9:05pm »
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Hi,  I followed with interest the posts on here.  I have a question.  Is it appropriate to ask for an upfront/token "fee" to see whether the potential licensees are committed?
 
Thanks
 
Harry
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If you are interested in a license...you must know how to drive.
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