Licensing is a method of commercializing your invention. When you strike a licensing deal, you grant another company the right to make, use, and/or sell products based on your “intellectual property.” The intellectual property at the heart of any such licensing agreement is typically covered by a patent you’ve been issued. The party granting the rights is the “licensor,” and the party acquiring the rights is the “licensee.”
The first and most important thing you can do when negotiating a licensing agreement for your small business is to work with an intellectual property attorney who is skilled in the area of licensing. While it may be expensive, it’s absolutely worth it. If you can’t afford to pay upfront, find an attorney who is willing to work upfront and defer the fees until the licensing agreement is executed and you get that first check.
When you license your invention, you should expect revenues to come your way in two basic ways - as a “royalty,” typically in the range of 5% to 15% of unit selling price, and as an advance payment of some kind, the amount of which is dependent on many variables.
Whatever amount is agreed to for the royalty, make sure you clearly define what the royalties will be based on. For instance, if you strike a deal in which you receive 5% of the net sales of the licensee, make sure “net sales” is completely defined. For example, it might be “gross sales minus returns, shipping, and taxes.” The important thing is to ensure that the licensee has no chance to be “creative” in calculating the amount on which your royalties will be based.