Sample Royalty Agreement HOME

Suggestions

First of all you have to realize these are just suggestions and are not deemed exhaustive, complete, or even reliable. They are just suggestions.

But, they have worked well for me (Editor@IHQ) and I am convinced that using as many of these examples as possible will definitely be helpful. So feel free to use one or two or even a combination of these examples with some of your own ideas.

InventorsHQ suggested 11 points to nail

In arranging a Royalty Agreement

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1) Nondisclosure agreement: All agreements must start with a signed, witnessed, and dated nondisclosure agreement.

2) Thirty days to accept or reject your product: This gives you your first out. In case the company starts off sluggishly or gives you bad signals. Or they are just plain dragging their feet. At the end of the thirty day period if a mutually agreed upon arrangement has not been met, the agreement is null and void, not withstanding the NDA.

3) One year to market: This is your second exit; if the manufacturer needs more than one year, they better have good reason. You can always grant an extension if need be, but will be dang nice to have that option if necessary to bag it and move on.

4) No Exclusivity: ____________ company shall be the nonexclusive agent with respect to this product.

5) Five percent without a patent and ten percent if you do: It would be safe to ask for a 5 % royalty on your product without a patent to protect your manufacturer from knock off’s of the product. But with a patent you can ask for as much as 10 %. Remember never to be greedy or ask for more than the industry standard, they know what is fair and will be annoyed at your lack of expertise in negotiating something fair and reasonable. Remember they are taking a huge risk with their money on your dreams and vision.

6) Derivatives: So much counts on this little word. You must clearly state that you want royalties on your product and any derivatives of that product. You would be amazed at how quickly an idea takes on changes and the inventor is left at the door. What I am saying is that the prototyper at the factory will begin to add his touches and changes to make it more manufacutereable, so that it can be mass- produced. It loses its originality and special ness and now all of the sudden the manufacturer thinks it is his. That is why we have the derivative clause. Sometimes they will create a spin off of your idea to develop a companion device. That one you will have to fight over, but the rule is, if it was derived from one product, even if it is completely different it is a derivative (in other words: the developer had he not seen and understood yours he would have never developed the next item).

7) Five year contracts with the right of renewal: Five years give you time to see what is going to happen in the market place with your product. At the end of five years you will either be tired of the company’s job, or ready to renegotiate for more of the pie! By know the company is either a believer in the product or not. If it is selling well, there is probably room to grab another point or two, again don’t be greedy. This is another out for you as well, if the company has done a poor job of representing your product, now is the time to walk. But if your contract does not clearly outline, that at the end of the contract, unless a mutually agreed upon contract is settled, than the product returns to your full and complete ownership.

8) Asking for more of the Pie: Okay you think maybe you have huge barn burner of an idea, and the manufacturer is not willing to give up any more of the pie, but you are thinking hey, this thing is going to make your company a very big profit, cut me in. How you do that is sneak in the back door. You put a clause at the bottom of your agreement that creates an increased percentage rate over a certain amount of sales per year generated. Something high, that would seem unattainable. But in the case that it does, you and the company would see a big old fat piece of pie. You know the rich get richer. Here is an agreement I have. I have twelve separate ideas with one company, and if I break $100,000 dollars in total gross sales in one year I get a free round trip Airlines ticket. Sounds simple doesn’t it. Know carry that principal over to the royalty rate. Okay we are negotiating the new agreement for the next five years, now you want 6 ½ or 7 % instead of five. Or if it is a new contract, you may take 4%, but you want it to jump to 6 if your gross sales reach $50,000 or better. And be respectful, the increased percentage is only on the amount over the agreed upon maximum. Such as, any amount over $50k gets the larger royalty percentage. $60,000 in gross sales equals 50k@ 4% and the last $10k @ 6%. Make sense. They are covered and you are covered. And every one in the end is mutually compensated accordingly.

9) Prototypes and mass production: Kiss your project goodbye and get ready to meet your new love. And no whining! When the manufacturer gets your product to a point to where it can be mass-produced, it changes. Sometimes a little, sometimes a lot! It is critical (and I can’t emphasize this point enough) to get a prototype back and try it out, before production begins. Before production begins. I do not how many times this simple instruction has cost the companies I am involved with thousands because of “loss of function” errors. Fatal errors. And what can happen is loss of trust of the client, they don’t want a repaired version they want their money back. That hurts you and your company. So implore your prototyper to concur with you for a final sign off on any and all of your products before production begins. This gives the opportunity to give it the go around and insure that its design function remains in tact and any last changes you may want to now add come into play. It also gives you one more opportunity to make upgrades that you may not have thought of earlier.

10) Advertising text: Another opportunity for nightmares. It seems silly, but someone not in the field does not have a clue how your particular device works. Do not expect them to. Use pictures, graphs, arrows, words, descriptions, examples, literally everything you have available to demonstrate the effectiveness of your product. Explain thoroughly the current problem and how your device solves it. And before the advertising is set up and printed, read it. Read it again. Now read it again. This is your one shot to get someone’s attention strong enough to buy your invention, make it dang good!

11) Print out of sales: You want a print out of all of your products sales for whatever time period is used for accounting (monthly, quarterly, etc.). You want to know every demographic you can. Price reduction sales, returned items, total costs, how many were sent out as demo's (for free), how many are returned due to poor craftsmanship, or because they didn’t like what it did or did not do for them. These are important keys to the overall success of your product. Keeping track of your product by using some sort of accounting spreadsheet to insure your getting paid correctly is important as well. You will need all of this info to determine if your product needs some fine-tuning or adjusting.

**You may want to consider making an outline of your proposed agreement (rough draft) with the company, so as you are discussing it you can add or delete items as they are discussed and agreed upon. At the end of your session you will want to have the amended rough draft signed and dated by the person whom you are making the agreement with . Whom ever that person is for that particular company (CEO, CFO, owner or duly representative). After it is signed by both parties have a copy made for their office and you keep the original. This little item will serve to give you the actual details of the agreement that later you can verify against the final agreement. I have had this come up on several occasions when the CFO, or whomever, when dictated to draft the final agreement sometimes perceives the agreement different than what was originally agreed upon, thus the agreed upon (signed & dated) "rough draft".

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Well, this isn’t exhaustive but hopefully with these few tools as I have explained them will at least help you to avoid some nasty slips I made and learned along the way. Some are even things I wish I would have done and will try on the next ones.

Randy C. Moyse, editor @ Inventors HQ