The ABC’s of Licensing Your Product

Great news! You’ve worked hard and created a successful product -- let’s say it’s an educational game with an environmentally savvy character named ‘Benny the Beaver.’ Sales are rising, and you’ve been noticed in the press. Suddenly you’re contacted by Marvin Manufacturer, who wants your permission to put Benny on his T-shirts! Marvin promises to pay you a small amount for every Benny T-shirt he sells, and he wants you to sign a contract right away.

Success is yours! This is wonderful! But before you sign that tempting contract, think about these points:

A is for AGREEMENT: What is a license agreement? A license agreement is a contract where Benny’s owner (you, the licensor) gives permission to Marvin Manufacturer (the licensee) to use Benny on the products Marvin sells. The license agreement sets limits on what Marvin can do with Benny: Can Marvin make just Benny T-shirts, or also Benny pajamas? Can Marvin sell in Europe as well as in the US? Can Marvin sell to both FAO and K-Mart? These points should be stated clearly in the license agreement.

B is for BIG: How big do you see Benny’s future? Will Benny appeal only to children, or could he become the mascot for a large environmental group appealing to all ages and across a broad range of products? Give Marvin only the rights he can effectively produce and market, and don’t lock Benny into a license that will limit expansion. Many license agreements are ‘exclusive’, meaning that no one else can use Benny on the products covered by the agreement.

C is for COMPETITION: Is Marvin Manufacturer the right licensee for Buddy? A good licensee distributes products to the markets in which Benny has a natural appeal – for Benny, that might be only children and environmental causes. Does Marvin distribute products to retailers with customers who know Benny and his environmental game? If not, there won’t be customers to buy the T-shirt, and without sales, you won’t get any royalties. Even worse, Benny’s image may be damaged by marketing through the wrong channels, and he may never recover. Check out Marvin’s competition and be sure Marvin is the right licensee for Benny.

D is for DOLLARS: In exchange for letting Marvin put Benny on T-shirts, Marvin will pay you a small amount for each Benny T-shirt sold. This payment is called a royalty. Royalties are calculated as a percentage of the sales price of the T-shirt. Royalty rates range from 2% to 15% of the sales price, depending on the type of product and its distribution. How the royalty is calculated, how often it is paid and what happens if it isn’t paid on time should all be covered in the license agreement, along with other important details of distribution and quality control.

E is for EXPERIENCE: A license agreement is a legally binding contract, and a bad contract with Marvin Manufacturer can damage Benny’s marketability permanently and limit your income now and in the future. Work with advisors experienced in licensing and law.

Carol A. Brittain has practiced business law in California for over 20 years. Previously General Counsel to Dakin Inc., she is now special counsel to the law firm of in San Francisco. Ms. Brittain practices business and corporate law, including general business counseling, entity formation, negotiation and preparation of agreements, securities offerings, and mergers and acquisitions, with special expertise in licensing matters. She can be reached at .