How much royalty should I ask for?

August 21, 2008 at 1:28 am Leave a comment

A foreign company is interested in the invention of one of our friends and he wonders how much royalty he should ask for. If the life of the patent is 15 years and the company makes an annual revenue of $100 billion, he is also wondering, “Should I ask for a one-time royalty or a percentage of profits/revenues?”

According to our expert, “There are several factors that you have to consider in making a decision.” In a nutshell, here are the major points to consider:

1. Sure the patent lasts 15 years, but what is the technology or product? Is it something that can easily be replicated or replaced by a better one in the market? If the answers to both are yes, then the seller should recoup as much early on in the implementation of the agreement. Normally, the prescribed royalty payment scheme could be initial down payment of X amount (lump sum), then running royalties based on generally sales. When computing for sales, parties can opt to use Gross Sales or Net Sales.

2. Is the product/technology already mature that no major development need to be incorporated? If there are further developments that need to be done in order that the product/technology can be marketed, then obviously the buyer will include that in his cost factor.

3. You can also use profit as base but only if you are confident enough that when the product is marketed it will take on.

4. As to the rate of royalty, what I have seen as standard now is 5% of net sales. If it is a breakthrough product or technology you can ask for a higher one. But for purposes of negotiation, it is better to quote a higher rate so that 5% will still be your floor. Licensing should be a win-win situation, so do not price the technology too high as to turn off the interested buyer.

5. There are other cost factors that can be included in the estimate. If the transfer would necessitate the training of the Japanese personnel or supervision by the technology owner during the adaptation of the technology into the manufacturing, then that is another source of payment outside of the transfer of the technology. Make sure the buyers will cover your per diem while providing this assistance.

6. Another option, if licensee would not want to bother anymore with the activities under a license, it is an outright sale. Here, the seller will have to be very diligent in forecasting the market for the product and potential sales, because if the product becomes a hit in the market, you lose your share in future earnings. If otherwise and you are happy because you will get paid but the buyer tries to bring down the sales price, then your negotiating skills should be really good.

7. Lastly, make sure the contract explicitly states that the buyer will market the product because sometimes licensees buy technology to shelf it because it is competing with their own existing products. There also ought to be no provision on the automatic transfer of any future major improvements made by the licensor on the technology. Should the buyer want to partake of the improvements, this must entail negotiations for a separate payment.

 Good luck!


Entry filed under: Intellectual Property Desk.

IP Desk William D. Dar, PhD

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