You Got a Licensing Deal! But…
Know What This Means and Doesn’t Mean Before Your Start Counting Your Money by April Mitchell
CONGRATULATIONS, you signed a licensing contract!
Everything is 100 percent golden. Now you just wait a year or so and collect royalties once your product/invention hits the store shelves, right? Not so fast.
Ideally, this is what should happen, but it doesn’t always pan out this way. Even though the purpose of signing a licensing contract is for the company to bring your concept to the market because it likes it and believes in it, your product does not always make it to market—nor do you always make money from it.
I have signed multiple licensing contracts and have had a few fall through, meaning the product never was made. It is tough when this happens and does not get easier.
A nonrefundable advance on royalties is the best way I have found to ensure I will make some money on my product, whether it makes it to the retail space or not.
But understanding how things work will allow you to be prepared and knowledgeable on the topic, so you aren’t caught off guard if it happens to you. Here is a breakdown regarding what I find a licensing contract to really mean, versus what it does not mean.
What it does mean
• Your product is liked by a company, and that company feels it is a great fit for its product line.
• Your product is off the market for pitching to other companies.
• You are hopefully one step closer to seeing your product on the market for sale.
• The company plans to manufacture your product and get it on the market to sell at retail.
What it does not mean
• Your product will make it to the market.
• You will make any money from your product.
• You will become a millionaire from your product.
Seek an advance
A nonrefundable advance on royalties upon signing a licensing agreement is the best way I have found to ensure I will make some money on my product, whether it makes it to the retail space or not. You earn this money upfront. (Note I am not a lawyer and do not give legal advice; I have learned this from my experiences.) Not all companies offer a non-refundable advance toward royalties, but it doesn’t hurt to ask. We as inventors take a risk when we sign a licensing contract. We take a risk that the company we sign with is going to follow through with the contract and get our product on the market.
When the company doesn’t follow through for whatever reason, it can feel like time wasted— that we were like sitting ducks unable to pitch our concept or do anything with it while we waited out the contract time. Companies we sign licensing agreements with also take a risk by investing in our concept. It cost a lot of money to invest in a new product, from possible molds to marketing and placement.
Unfortunately, a lot can happen between signing a contract and the follow-through. Sometimes when a company realizes or decides it is not going to follow through on manufacturing your product, it will let you know as soon as it has decided and release you from the contract. When this happens, I like to ask for a statement with a signature stating so. This way, I can get pitching the concept once again.
Legal questions may arise, even after you have a licensing contract. “What happens to the company if it does not uphold its end of the contract?” “Isn’t it illegal for the company not to manufacture and sell my product, since we signed a contract?” For these questions, I direct you to a lawyer who directly deals with licensing contracts. Simply put, the more contracts you see, negotiate and sign, the better you will get at deciphering what is a good and fair deal for you.
Also, you will get better at deciding what products you are willing to take a risk on if there is not a non-refundable advance upon signing. I am a big believer in licensing concepts to companies. I think it’s a great way for an inventor to get one or many items on the market without starting a business for each product. I encourage you to celebrate the steps along your licensing journey—yes, signing that contract, and especially when your product makes it to the retail space!