Top 5 Questions Inventors Should Ask Before Signing a Licensing Agreement

Licensing your invention to a company can be a game-changing opportunity, but it’s essential to ensure you’re making the right decision. A licensing agreement outlines the terms of your partnership, including rights, obligations, and profit-sharing. Asking the right questions before signing can protect your interests and set you up for success.

Why Asking Questions Is Critical

Signing a licensing agreement is more than just a business decision—it’s a legal commitment. Without due diligence, you risk losing control over your invention or receiving less compensation than your idea deserves. These five key questions can help you make an informed decision.

What Are the Royalties and Payment Terms?

Understanding the financial aspect of the agreement is crucial.

• Royalty Rates: What percentage of the sales will you receive? Is that number based on net sales, gross sales, profit, or something else?  Ensure the rate aligns with industry standards for your product category. Be sure you’re clear about how the royalty is calculated. 
• Payment Frequency: Will payments be made monthly, quarterly, or annually? Typically companies pay royalties on a quarterly basis. 
• Advance Payments: Is the company offering an upfront payment to secure the licensing rights? Some may offer an advance on royalties, which can be used to cover patent expenses. Remember, this is an advance, so they will reduce your royalty checks until it is paid back. 

Clarify these terms to avoid any surprises or disputes down the line.

Who Owns the Intellectual Property?

Your intellectual property (IP) is typically considered the foundation of your invention's value in the eyes of most companies. Ensure the agreement explicitly states:

• Retention of Ownership: Do you retain ownership of your patent, trademark, and/or copyright?
• Usage Rights: How can the company use your IP, and are there limitations?
• Post-Agreement Terms: What happens to your IP after the agreement ends?

Clear ownership terms protect you from losing control of your invention.

How Will the Product Be Marketed and Distributed?

The success of your invention depends on how it’s presented to the market. Ask the company:

• Marketing Strategy: What is their plan to promote your product? Will your product roll out to all their distribution points or will they start slower, perhaps online only then expand?
• Target Markets: Are they focusing on regions or demographics relevant to your invention? Get a sense of their plan for which markets they plan to sell to. 
• Distribution Channels: Where will the product be sold (e.g., retail, online, or direct-to-consumer)? Get a sense of their plan for which markets they plan to sell to. This may include but not limited to retail, online, catalogs, co-ops and much more. 

Understanding the company’s vision for your invention ensures alignment with your goals.

What Are the Performance Milestones?

Performance clauses hold the licensee accountable for achieving specific objectives. These may include:

• Sales Targets: Minimum sales numbers the company must reach within a given timeframe. Keep it reasonable and remember they are taking on the bulk of the risk here. 
• Development Timelines: Deadlines for product development, manufacturing, or launch.
• Termination Clauses: What happens if the company fails to meet agreed-upon milestones?

Setting measurable benchmarks protects your interests and ensures progress. Be sure to discuss these carefully and keep an attitude of win-win. It’s considered best practices to discuss performance clauses once the other items are negotiated and agreed upon, rather than at the beginning of talks with potential licensees. 

What Legal Protections Are in Place?

Licensing agreements are legally binding, so it’s vital to understand how disputes will be handled. Key considerations include:

• Indemnification: Who is responsible if the invention faces legal challenges, such as patent infringement claims?
• Termination Terms: Under what conditions can the agreement be ended by either party? What are the requirements laid out in the agreement? 
• Confidentiality Clauses: How will sensitive information about your invention be protected?

Consulting with an attorney experienced in licensing agreements can help you navigate these complexities.

The Importance of Negotiation

Remember, licensing agreements are negotiable. Don’t feel pressured to accept the first offer. Asking these questions gives you leverage to advocate for better terms. Whether it’s securing a higher royalty rate or adding a performance clause, negotiation ensures a win-win partnership.

Common Pitfalls to Avoid

Inventors often make mistakes when entering licensing agreements, such as:

• Failing to Read the Fine Print: Always review the entire document with a legal expert, and ask clarifying questions. You want to feel comfortable with the agreement by the time it’s finalized. 
• Overlooking Exclusivity Terms: Ensure exclusivity doesn’t restrict you from pursuing other opportunities. Many companies will ask for an “exclusive” but you can discuss what that means to them, where they sell, and if they really need an exclusive in areas they don’t sell in, such as other countries. 
• Ignoring the Company’s Track Record: Research their history of honoring licensing agreements.

By avoiding these pitfalls, you can safeguard your invention and financial future.

Why Due Diligence Matters

Taking the time to ask these questions may delay the process, but it’s a necessary step to protect your invention. A well-negotiated licensing agreement provides clarity, ensures fair compensation, and fosters a successful partnership both parties feel good about!