Licensing 101: All You Need to Get Started
“Licensing is renting an idea or a brand or intellectual property to a third party for some type of compensation.”
Licensing is a vital component of many businesses' growth strategies. It enables companies to expand their product lines, reach new customers, and generate additional revenue streams. However, licensing can also be complex, with legal and financial considerations that must be carefully navigated. In this blog — based on a presentation by Stephanie Pottick, a former toy industry exec and attorney — you’ll learn how licensing works and how you can use it to add to your bottom line.
Licensing In Vs. Licensing Out
Licensing is when one company allows another company to use its intellectual property, like a brand or a product design, for a fee. There are two types of licensing: licensing in and licensing out. Licensing in describes when a company wants to use someone else's intellectual property. For example, a game company like Hasbro might want to make a Star Wars version of its popular game Monopoly. In this case, Hasbro would be licensing in the Star Wars brand from Lucasfilm. On the other hand, licensing out describes when a company allows another company to use its intellectual property. For example, Hasbro might allow a shoe company to make shoes using the Monopoly brand.
Licensing can be a great way for companies to expand their product lines and reach new customers. By licensing in someone else's intellectual property, a company can create new products that appeal to a wider audience. And by licensing out its own intellectual property, a company can earn money without having to do the manufacturing and sales itself. But licensing also comes with risks. If someone claims that the licensed intellectual property infringes on their own intellectual property, the licensee may be on the hook for legal fees and damages. That's why companies need to protect themselves with strong contracts and legal guidance.
A licensing agreement is a legal contract that outlines the terms of a deal between two parties. It is important to thoroughly understand the agreement before signing it, as anything you don't know about the agreement can potentially harm you. Take this example: A designer signs a licensing agreement with a company, allowing them to use her designs on their products. However, she later discovers that the contract includes a clause that gives the company the exclusive right to use any new designs she creates during the term of the contract. This prevents her from entering into any other licensing opportunities until the contract is over, leaving her stuck for the term of the contract.
To avoid situations like this, working with someone who understands licensing and can review the contract before signing it is crucial. Every company has different concerns, and negotiating terms can be challenging, especially when dealing with larger companies. However, understanding the agreement's terms is essential to ensure both parties comply.
If you're considering licensing your brand or intellectual property, knowing some key terms can be helpful. These terms include royalty rates, net sales, exclusivity, territory, contract term, renewal, guarantee, advance, and termination.
Royalty rates are the percentage or amount you will get for sales using licensed property. The royalty could be a flat fee or a percentage based on net sales.
Net sales are the gross sales minus allowable deductions, including retail or rebates, discounts, platform fees, returns, and more. As a brand owner, you should try to cap allowable deductions to a certain amount whenever possible to make more money. However, if you are the licensee or manufacturer, you may want to deduct the full amount.
Exclusivity refers to whether the license will be exclusive or non-exclusive. If you are the licensee or manufacturer, you probably want an exclusive license to reduce competition for your licensed goods. On the other hand, if you are the licensor or brand owner, you may want a non-exclusive license so you can license your brand to multiple companies for similar products. Having an exclusive license can give you a competitive advantage in the marketplace.
Territory refers to where the licensed products can be sold and not sold, and this can vary by region, i.e. North America, the U.K. etc.
Contract term refers to how long the contract will last. Remember that products take time to design, manufacture, and sell, so the contract term should account for this.
Renewal refers to how renewal will be handled or addressed. Some contracts may include automatic renewal if a certain sales benchmark is hit. If there’s nothing in the contract about renewal, then it is not automatic.
Guarantee and advance refer to the amount guaranteed to be paid by the licensee to the licensor over the contract term, and the amount paid upfront by the licensee to the licensor upon execution of the contract.
Termination refers to the reasons or causes for which a party can terminate the contract. It is important to think about things that can go wrong during the course of working with the other party and then think of ways to address those that are amenable to both parties.
A licensing agreement is like other contracts — it is a way to manage expectations in the business relationship. Even though each agreement is different, paying close attention to the details during the negotiation process can help avoid problems in the future. Whether you're a brand owner or a manufacturer, having a good grasp of the basics will help you succeed in the licensing industry.