Inside a license agreement: decoding the language for newcomers
You are willing to pair with a well-known brand/intellectual property or even about to sign your first license agreement.
This article highlights and describes the main business terms of a typical license agreement. Such agreement is written and provided by Licensor further to a deal memo (summary) you have both agreed on.
Parties: between the intellectual property owner (the ‘Licensor’) and your company (the ‘Licensee’).
Intellectual Property: the agreement shall precisily specify which IP is granted for licensing.
Licensed product, i.e. list of licensed items you intend to develop, manufacture, distribute and market.
Channel of distribution in which you can sell the licensed items.
Territory, i.e. list of countries where you are able to distribute the licensed items.
Term, i.e. duration of the agreement with the start and the end dates. It generally includes a sell-off period to clear the potential stock of items. It also includes some general termination conditions.
Non-exclusive (mostly) or exclusive license in regard to the defined conditions above.
Minimum Guarantee/Advance: you shall pay to Licensor a Minimum Guarantee amount, non-refundable but recoupable against future royalty payments. This MG is defined and agreed based on your sales forecast. According to Licensor, MG applies either across the whole contract conditions (we call it ‘cross-collateralized’) or can be different and additional per IP, per year and per territory.
Royalty rates, i.e. percentage of the licensed item’s net sales. Agreements usually include two or three differents royalty rates to apply according to the type of sales: Domestic, FOB or Direct-to-Consumer. Royalty payment to Licensor shall start once the MG has been recouped.
Product introduction date informs when the licensed items will be available for consumers or end-users.
Common Marketing Fund: Licensor may request you to pay a contribution for its marketing and communication efforts. In some ways, you should be able to benefit from these activities. The contribution is either a percentage of the licensed item’s net sales (on top of the royalty) or a flat fee.
Marketing commitment: Licensor may request you to commit on marketing activity/campaign promoting the licensed items. This commitment may define specific activities and/or a minimum amount of investment.
Product samples: you shall provide Licensor with a number of licensed item samples, free of charge to the Licensor.
Then, the general terms and conditions contain many clauses including but not limited to the Product approval process, the Reporting and payment details and the option for Licensor to conduct an Audit ensuring all the contract’s commitment have been met.
Finally, if you offer physical goods, you will be requested to provide Licensor with the Manufacturing agreement signed by your factory.