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(Message started by: mike on Aug 3rd, 2004, 9:34am)

Title: Royalty Rates
Post by mike on Aug 3rd, 2004, 9:34am
Good Day All,

I have read that there are customary "industry specific" royalty rates used for licensing patent rights.  

Where can I find a reference for standard/customary rates by industry ?

I have been asked to provide the "terms" for licensing rights to my patent but I am uncertain where to start.

Title: Re: Royalty Rates
Post by W on Aug 3rd, 2004, 1:16pm
Check what the going rate is for your industry, consider the total amount of (possible, realistic) revenue (for the first 5 years) generated by your invention upon entering the marketplace, subtract out advertising and manufacturing, then take a fraction of that.

For Manufacturing, you often times go with an immediate paytout + small percentage royalty. For Hardware (electronic) it's a slightly larger percentage royalty. For Software, it's a much larger percentage royalty (manufacturing costs are very small). For Biomedical, I do not know.

Here's an article for your consideration: http://www.cafezine.com/Index_article.asp?id=375&deptId=3

Best bet? Consultant. Get them to mediate the deal. They'll find a price that is acceptable to both parties.

Oh yeah, exclusive rights are higher than non-exclusive.

-W

Title: Re: Royalty Rates
Post by W on Aug 3rd, 2004, 1:33pm
As an after thought, if this is your first time drawing up your licensing terms, you may want a contract lawyer. I do not know if they have a grasp as to the royalties in your industry, but they can keep you from accidently giving away the farm.

-W

Title: Re: Royalty Rates
Post by mike on Aug 3rd, 2004, 2:39pm
W,

Thanks for your reply and comments. This is my first stab at this and I am somewhat hesitant to begin negotiation

Have you any experience with patent valuation?

Title: Re: Royalty Rates
Post by W on Aug 3rd, 2004, 3:32pm
Some, but not first-hand (the actual valuation is done at the table, by consultants or lawyers).

What you need to understand about licensing a patent is that a patent is like art: different people perceive different values.

Let's say you think your patent is worth $25M.
The people interested in your patent think it's worth $15M.
Your mediator(s) (lawyers on either side, arguing) want to settle on a price that you can both live with. Perhaps it's $15M, maybe it's $25M, maybe it's $20M, maybe it's $17M.

Until and agreement is hammered out, and all your signatures are on that piece of paper, the 'value' of your patent is a grey area: $$M. What it turns out to be is up to your negotiator. Which is why it is important to have (usually) a lawyer (and a good one at that), ready to argue. No matter how much money you may think you can save by going it on your own, you will always save less than having a lawyer directly involved.

Good Luck,
-W

Title: Re: Royalty Rates
Post by mike on Aug 3rd, 2004, 4:17pm
W,

I have been interviewing lawyers over the past couple of weeks. I expect to make a selection by the end of this week.

Is it better to start with the potential buyers agreement or my agreement ? Please explain.

Title: Re: Royalty Rates
Post by W on Aug 3rd, 2004, 5:18pm
Could you explain a little more? Typically, two parties meet and discuss what they want; then their lawyers call each other over the phone and hammer out any differences. There may be a few more meetings to work out any particulary troublesome areas, but overall that's how it works.

-W

Title: Re: Royalty Rates
Post by mike on Aug 3rd, 2004, 7:27pm
W,

OK, here is the scoop: I do not know what I am doing !

I think this is the best way to start: I applied for a patent on a dare by my wife. The patent was granted and I started sending out sales flyers.

Of the 20 or so flyers, I have several nibblers but 3 hard takers. The hard takers have asked for my terms.

Since I filed the patent app with out legal assist, and I have no business experience, I was not prepared when the hard takers asked for my terms.

At this point my options appear to be:1. compose my own agreement with the help of legal, or ask the hard takers to submit an offer that I can take to legal to review.

So, which do I do ? Pay legal to compose a "in my best interest" contract or ask the hard takers to submit an offer.

Any advise ?


Title: Re: Royalty Rates
Post by W on Aug 3rd, 2004, 9:24pm
Find out exactly what the hard-takers want (there are many, many different types of licensing), then call in your lawyer. He'll handle everything from there, and put you in the best position.

-W

Title: Re: Royalty Rates
Post by W on Aug 3rd, 2004, 11:07pm
You probably want to go it alone right now (finish the job so to speak), but now you need to decide what you love more: money or pride.

Me? I'd pick the money aspect. If you have a patent of any worth (which you undoubtably do), having that much extra money in your pocket at the end of the day will soothe any ego.

Let's admit it: lawyers are the best at what they do (making other people pay). They have it down to a fine art. And nothing is going to kill your pride more than wondering for the rest of your life if you could have gotten more.

I mean no disrespect with regard to your negotiation skills, I am simply offering my take on the situation.

Best of Luck,
-W

Title: Re: Royalty Rates
Post by mike on Aug 4th, 2004, 7:37am
W,

When I am asked "What are my terms", should I have a lawyer prepared agreement (with my terms) ready to send out (the agreement will be negotiated by my lawyer)  ....... OR.....

Should I ask for an offer to be submitted to my lawyer to be negotiated ?


If I can solve this question, I will also be able to solve the question "which came first, the chicken or the egg ?"


Title: Re: Royalty Rates
Post by W on Aug 4th, 2004, 12:39pm
Wait for the offer to be submitted to your lawyer for negotiation.

-W

Title: Re: Royalty Rates
Post by Frozen_out on Aug 5th, 2004, 3:29pm
Dear Mike,

You have to spend money to make money. Frankly, from what you have said, it is doubtful that the claims of your patent give iron clad protection.

Title: Re: Royalty Rates
Post by Frozen_out on Aug 5th, 2004, 3:36pm
Dear Mike,

I pressed the wrong button on the reply before finising the entry. If you have someone willing to pay you for you patent, it might be worth you while to spend the money to have a contract drawn that maximizes your rights. It is not a question of pay a lawyer it is a question of paying a llawyer who knows what and how to do.

For instance, the claims of the patent might be avoidable, a knowledgable lawyer might include a licence of technolgy.

M. Arthur Auslander  
Auslander & Thomas-Intellectual Property Law Since 1909
3008 Johnson Ave., New York, NY 10463
7185430266, aus@auslander.com
ELAINE's Workshop®
E arly L egal A dvice I s N ot E xpensive™
Reality Check®

Title: Re: Royalty Rates
Post by mike on Aug 8th, 2004, 6:31pm
Thanks for your reply.

Please understand my question is not whether I should have a lawyer involved from the start. This has always been in my plans.

The question has to do with whether I should have my lawyer prepare for me a "in my best interest" agreement. This agreement would then be sent to parties who ask for my terms.

This agreement would set the bar by containing minimum agreement conditions for any offer that would be made. Of course I expect there to be some discussion and negotiation on any proposed agreement.

This agreement will set the standard by which all offers will be evaluated.

It has been suggested alternatively, that I wait for the interested party to issue a proposed agreement.

For the two offers I have recently received, it is to late to use the first approach above described. However if an agreement with these do not work out, which approach would you suggest ?



Title: Re: Royalty Rates
Post by JimIvey on Aug 9th, 2004, 11:39am
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.

Title: Re: Royalty Rates
Post by mike on Aug 9th, 2004, 12:41pm
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 ?


Title: Re: Royalty Rates
Post by JimIvey on Aug 11th, 2004, 9:19am
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.

Title: Re: Royalty Rates
Post by mike on Aug 11th, 2004, 1:46pm
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

Title: Re: Royalty Rates
Post by Harry on May 6th, 2006, 9:05pm
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

Title: Re: Royalty Rates
Post by JimIvey on May 10th, 2006, 6:52pm
Again, I'm not intimately familiar with all the ins and outs of licensing.  However, I understand it's not outrageous to accept an up front fee, particularly if you're promising something in return -- like promising to delay negotiating (or agreeing) with others for a period of time.  For example, you might promise to give the potential licensee a month to evaluate your product/idea before considering offers from competitors and charge an up-front fee for that.

The bottom line in contracts is that you can ask for just about anything.  Will some things offend the other side?  Hard to say.  It depends largely on the other side.

Regards.

Title: Re: Royalty Rates
Post by Harry on Jun 25th, 2006, 9:13pm
HI

The company that has an interest in conducting a feasibility study has agreed to pay to have us suspend our activities in regards to appraoching others until the study is done.  they have suggested that the fee should not be more than 6 figures otherwise that might balk.

Should I ask them to make an offer and move on from ther?

Any suggestions will help;

Thanks

Harry

Title: Re: Royalty Rates
Post by e3 on Jun 26th, 2006, 6:56pm
I don't have much experience in this except what I've heard through people I've talked to so take this with a grain of salt.

I managed to successfully get in contact with this inventor guy I had seen a special on TV. He sold a simple toy idea to Disney and now he has licensed about 10-20 ideas ideas and basically he never has to work again. But he mentioned that he has also licensed some gaming ideas to people like milton bradley and the likes, and that every contract with different companies is completely different.

He said that for the gaming companies the average royalty was 5% of total sales, but that sometimes there his laywer was able to negotiate and up-front fee and sometimes not. He also said that on some of his contracts, he has it set up that he gets paid a certain set amount if the company doesn't reach a certain quota for sales that month. That sounds like a sweet deal.

From what I've read in books, I think it's very rare these days that someone can retire off one idea. The inventor guy I talked to also mentioned that he had about 20 ideas that failed, before he got his first successful idea licensed. That was not fun to hear but thus is reality and good information to know. That's not too encouraging but he said that he was diligent and just kept working hard at it.

Back to the royalties thing, he said his biggest check ever to come in for one month was around 30k, but wouldn't tell me what any of the checks average per month or anything like that except to say that 'i (he) never have to work again'.

Thanks,
M

Title: Re: Royalty Rates
Post by Atomical on Sep 16th, 2006, 9:13am
Assuming that your invention is the product, and not just an improvement, wouldn't it make sense to charge 50% royalty rate and allow the business to write off expenses before the amount is calculated?

I guess I should state that in my case the software is the product and there are no other patents involved.

Title: Re: Royalty Rates
Post by Wiscagent on Sep 16th, 2006, 9:52am
“… wouldn't it make sense to charge 50% royalty rate and allow the business to write off expenses before the amount is calculated?”

At any given time the typical business has many options on how to spend its money.  When approached by a (potential) licensor the licensee has to evaluate the impact of the deal on the whole business.  Even if the licensor were asking for a nominal royalty, business management needs to weigh the known costs (dollars, time, disruption to current operations) and risks (financial, customer, labor and vendor relations, legal) against potential benefits (financial, brand equity, and so forth).  Needless to say, higher royalty rates make the proposition less attractive to the business.

The business should always ask “Is this the best place to invest our limited assets?”  Here “assets” include management’s time and effort, not just financial considerations.  For example – management should consider - rather than license this invention, “Would we be better off expanding our sales staff, or implementing some cost reduction programs.”

So sure, you can ask for half the profits.  And the business can simply say “No thanks.”

Title: Re: Royalty Rates
Post by biopico on Sep 16th, 2006, 11:39am
If asking royalties up to 50% especially when many factors are involved (time and labor for marketing and sales, etc), I wonder who would feel the licensing was mutually profitable.    

Title: Re: Royalty Rates
Post by Atomical on Sep 16th, 2006, 12:17pm
Assuming that the business proposition is a giant hit, would it be a good idea to raise the royalty percentage?

Title: Re: Royalty Rates
Post by biopico on Sep 16th, 2006, 12:52pm
Under the circumstances of a blockbuster proposition, I agree.  Then who would reasonably determine that the outcome would be a giant hit when no one knows how marketing would turn out to be?

At the end of the day, each party of interest would have to agree with the terms and conditions reaching a mutually agreeable royalty (5%-60%)?

Title: Re: Royalty Rates
Post by Atomical on Sep 16th, 2006, 12:55pm

on 09/16/06 at 12:52:39, biopico wrote:
Under the circumstances of a blockbuster proposition, I agree.  Then who would reasonably determine that the outcome would be a giant hit when no one knows how marketing would turn out to be?

At the end of the day, each party of interest would have to agree with the terms and conditions reaching a mutually agreeable royalty (5%-60%)?


I'm suggesting of raising the royalty after the product becomes a big success.  

Title: Re: Royalty Rates
Post by Wiscagent on Sep 16th, 2006, 5:29pm
“[Raise] the royalty after the product becomes a big success.”

That’s nice work if you can get it.  But as George Gershwin wrote:

 The man who only live for making money
 Lives a life that isn't necessarily sunny;
 Likewise the man who works for fame --
 There's no guarantee that time won't erase his name
 The fact is
 The only work that really brings enjoyment
 Is the kind that is for girl and boy meant.
 Fall in love -- you won't regret it.
 That's the best work of all -- if you can get it.
 Holding hands at midnight
 'Neath a starry sky...

 Oh that is nice work if you can get it.
 And you can get it -- if you try.
 Strolling with the one girl
 Sighing sigh after sigh...
 Oh nice work if you can get it.

Title: Re: Royalty Rates
Post by Atomical on Sep 16th, 2006, 6:09pm

on 09/16/06 at 17:29:02, Wiscagent wrote:
“[Raise] the royalty after the product becomes a big success.”

That’s nice work if you can get it.  But as George Gershwin wrote:

 The man who only live for making money
 Lives a life that isn't necessarily sunny;
 Likewise the man who works for fame --
 There's no guarantee that time won't erase his name
 The fact is
 The only work that really brings enjoyment
 Is the kind that is for girl and boy meant.
 Fall in love -- you won't regret it.
 That's the best work of all -- if you can get it.
 Holding hands at midnight
 'Neath a starry sky...

 Oh that is nice work if you can get it.
 And you can get it -- if you try.
 Strolling with the one girl
 Sighing sigh after sigh...
 Oh nice work if you can get it.


I'd rather not interpret the poem :P



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