Negotiating A Licensing Agreement Like a Professional

Congratulations!  A company wants to license your design(s) and/or your product(s).  You feel excited, a bit scared, and don’t know where to start when it comes to negotiating the licensing agreement.  Well, never fear.  This quick reference guide will give you the tips and tools you need to successfully negotiate your licensing agreement.

  1. Negotiating licensing agreements take time—more time than you might like. It can be overwhelming.  It is a give-and-take process in which both parties get some of what they want, but neither gets all of what they want.  Be prepared to compromise.  There are so many little details to negotiate that you cannot address all of them at one time.  Begin with the easiest And broadest terms first to get the negotiation ball rolling.  Then, later on, when you are growing weary of the back and forth process, address the finer details.  By then, the company will have invested time in the process and will be more eager to agree to your proposals.  Remember that time is your friend.  Be cautious of any company that wants to rush you through the negotiation process or wants you to sign a contract in a big hurry.
  1. Negotiating with a big and powerful company does not necessarily mean that you are at a disadvantage in the negotiation process or that you are powerless. Remember, you have something the company wants bad enough to license it from you.  The more that you don’t need the deal, the more leverage you will have in the negotiation.
  1. Do your due diligence. Research the company to understand the company’s business.  What are the company’s strengths and weaknesses?  What does the company sell, how much does it sell, and in what markets does it sell?  Are the company’s products sold by major retailers, specialty shops, or big-box stores?  The more insight you have into the company, the stronger your negotiating position.  Knowledge is power.
  1. Have realistic expectations. Licensing agreements can be complex and somewhat incomprehensible.  They address everything that can go right and everything that can go wrong.  Don’t be upset if you are not familiar with how licensing agreements are written.  Don’t freak out.  Take the time to review licensing agreement forms or templates to familiarize yourself with the standard terms and conditions set forth in licensing agreements.  You can purchase a lawyer-drafted and peer reviewed licensing agreement form from Michael's store.
  1. Start the negotiation by completing a “term sheet” addressing the major terms and conditions to be included in the final licensing agreement, including, for example, royalty rate, exclusivity, territory, sales milestones, term, etc. At this initial stage, you are getting to know each other and you can decide if you’re able to work together.  Only after hammering out the broad set of terms should you start working on drafting a licensing agreement.  An excellent example of “term sheet” guidelines can be found at:
  1. Have a win-win mindset. Be a team player.  Show respect.  Build trust.  Find a way to stay positive in the throes of conflict or disagreement and people will want to work with you.  This is important because once the agreement is signed, you’ll likely be working with the very same people who negotiated the deal.  Set the tone from the beginning that you are committed to the process and to the company, and that you are looking forward to making your relationship work for both parties.
  1. Maintain a sense of humor.
  1. Remain calm, cool, and collected (a/k/a professional) when things get heated or when disagreements arise.
  1. Don’t take things personally. It’s just business.
  1. Hold something back. You won’t get everything that you want out of the deal, but if you concede too much in the beginning, you may end up giving away more than you feel comfortable with.
  1. Put yourself in their shoes. Try to remain objective and see the other side’s position on any given issue.  Remember that the company is taking on risk by taking a chance on you.
  1. Talk to the company’s representative(s) in person, over the phone, more often than not. Email has its limitations.  If you think that there is a term in the agreement that requires more discussion, or if you wish the agreement to include additional language, call the company and relay your concerns.  If you are lucky, the company may agree to include your provision or wording right away, saving both parties time and eliminating possible frustration.
  1. Givers receive. If you give exclusivity, you should get a higher royalty rate.
  1. Don’t enter into a licensing agreement without an exit strategy in case things go wrong. The agreement must contain provisions addressing the how, when, and why you need to get out of the agreement to preserve your brand identity or your industry reputation.  It’s your brand and you need to protect it.  In the unlikely event of unforeseen risk or potential damage to your brand and/or your intellectual property rights, you need to know the triggers for terminating the relationship.  If the relationship is not successful, you need to be able to cancel and move on.
  1. The term of a license agreement should be long enough for the company to recoup its investment in the deal.
  1. Make sure that your copyrights and trademarks are properly registered.
  1. Always have your final licensing agreement reviewed by a lawyer in your jurisdiction before signing it. Review of a finalized contract is relatively inexpensive and a good way to ensure that you have not missed anything in the agreement.

Finally, remember that there is no such thing as a perfect contract.  All contracts have flaws, but by utilizing these negotiation tips and suggestions, your agreement will be as close to perfect as possible.

Back to blog