7 Facts about Royalties (and how to get the biggest one)

By Perry Kaye

Founder/CEO, Perry Teri Toys

Chairman, MIT Enterprise Forum

I have negotiated great and crappy royalty deals. These are some of the things I have learned in my journey. I hope they can be useful to you.

1: Royalties are negotiable: TRUE!

There is no such thing as a “Standard Royalty”. Yes, many inventors always ask me what is the “Standard Royalty”. They think, “Oh, I hope I can get that.” Maybe they can, maybe they can’t but maybe they can also do better!

I have heard of royalties larger than 25% and as low as .05% (500ths of 1 percent). Your royalty will most likely be somewhere in between, if you’ve done everything else right and also find a willing licensee.

“Standard Royalty” is a fallacy because each company and inventor has their own definition of what the “standard royalty” is. That is true. But we are also told that “because companies have the cash they get to set the royalty rate.“ That is not true.

Better innovations can get better royalty rates. Just like Tom Hanks can demand more money to than a new actor so can your superstar invention. A great invention, executed superbly can ask for more and expect to get it. Don’t be greedy but don’t be a fool either. Negotiate your royalty rate even it that means simply asking, “is this the best royalty rate you can offer me?” You might just be surprised at the answer.

2: 3% means $30k out of every $1,000,000? TRUE!

If I gave you $1,000,000 would you give me $30,000? Sure, because $30k is a pittance compared to the million bucks. Yet many inventors sign over their inventions for just that.

Any company that can pay 3% can also afford to pay 4%. It is the inventor’s job to show the company why the invention is worth the extra $10,000.

3: Royalties can be more than just % of Net Revenue? TRUE!

Yes, when you get your royalty agreement you will see that it describes how the royalty is calculated. And this will usually be something like “X% of Net Revenue less returns and Charge Backs and etc”. But you might find it valuable to ask for other rights to increase your revenue in the deal. Many of these asks do not even hurt your Licensee as they might be giving them away to someone else anyway.

Like the rights to sell on Home Shopping channels. Many companies give these rights away anyway because they don’t have the expertise or the deals are too small for them. Or the rights to sell in the promotion and premium markets these too are often neglected. As part of your negotiation, why not help your licensee out by working to sell the product along side them?

4: Every Invention is Worth the highest royalty? FALSE!

The truth is some inventions are worth more than others. If you have a hot property with several companies interested in licensing then you can expect a better deal with higher royalty.

If you have a marginal idea that one company maybe wants then you get what you get.

I once spoke with a woman that invented a new type of baby stroller for dolls that she patented. It was complicated and expensive and not that much different than other toys for little girls playing with dolls. When I asked what she wanted to do with her patent she said, “I just want to make my $1,000,000 and move on to my next invention.”

Now I don’t know about you but I don’t see a gold rush for new doll strollers. The idea, while patentable, was hardly revolutionary. So I said to her, “Wouldn’t you be happy making $50,000 off this?” She said, “no, it has to be a million dollars”. I knew someone interested in new doll inventions and was going to setup a meeting but her attitude made me realize that I couldn’t help her because I couldn’t work with her.

For her to make $1,000,000 the Licensee must sell $20,000,000 (assuming 5% royalty). What are the odds of that happening without a true innovation?

Reality must be part of your negotiation strategy. If you don’t have a true innovation that people want then you may not earn even the first $1 of your million dollars. Maybe $50,000 should make you happy?

Negotiate professionally and remember everyone needs to make money for the deal to go through

5. My invention is my baby? FALSE!

Your babies are the little ones you kiss and tuck into bed at night. Your invention is not your baby!!! Invention-babies are the most ludicrous statement I hear from new inventors. And no other industry I can think of acts in this childish manner.

Your invention is your business. Yes, some people will hate your invention, say bad things about it, maybe even call it and possibly you bad names. So what!

The big question you should be concerned with is will it sell and can I make a profit? That is what you should be concerned about, not your emotional attachment to your invention.

6. The company won’t budge… the royalty is the royalty. FALSE!

Your negotiating power is based on your products ability to sell and make a profit. If you assemble a great product, find an outstanding factory and begin taking advanced orders. You will get a higher royalty than the person who brings in a napkin sketch and a nebulous idea.

Royalties increase when risk is lowered and profitability is certain. This is why big companies love when a celebrity is tied to the product. If Bon Jovi is endorsing your product your negotiating power is greatly enhanced. If you have revenue and profits your power to negotiate also increases. And it just may be easier to make the profit than it would be to get Bon Jovi!

For one of my products, in one day, I had turned down 2 licensing offers and was about to turn down a third one when I was offered an outstanding deal. Competition and a really great product help you get fatter royalties. Three licensing offers in one day. That is why I really love tradeshows!

7. Once I sign the agreement the invention is their problem. FALSE!

You only get the royalty if the invention sells. It is in your mutual best interest to make sure the product sells and the company makes a profit too.

Work hard and share in the pie. Help your Licensee and be a good Licensor. If this invention goes well then maybe they will license more product from you. And that is what you want.

In summary the best products, those highest in demand and able to make great profits, get the best royalty deals. What are you doing to make your inventions the best they can be?

(November 2016)