10 Critical Points to Include in Your Licensing Agreements

The new economy values intellectual property and content.

For businesses where digital assets include intellectual property, licensing is often a viable, and lucrative, revenue stream. But, it shouldn’t be entered into until a formal licensing agreement has been signed by all parties with a stake in the outcome.

If the people we choose to work with were always on the same page with us throughout the professional relationship, we wouldn’t need to worry about legal agreements. But this is rarely the case.

In general, our working relationships tend to run more smoothly when contracts and other agreements are in place before work begins. That way, we can openly negotiate any differences of opinion we have as to how the relationship will unfold. And all parties have a chance to be heard.

When we resolve misunderstandings beforehand we can save time and energy and reduce the hurt feelings that often arise after work is underway.

That is why it's important to negotiate the terms of a licensing agreement up front, something I learned long ago from entrepreneur and lawyer Elizabeth Potts Weinstein.

Here is her advice on the 10 critical points to address in any licensing agreement:

1. Exclusive or non-exclusive. In an exclusive license, the intellectual property holder is licensing the work only to one person, for that particular use/territory. Because you can only exclusively license that property one time, this license should cost more money. An exclusive license may be used if an independent contractor is creating a custom deliverable specifically for one business, or if a business is dividing up territories among different professionals in a certification or licensing program. On the flip side, if you created a set of WordPress templates, for example, each of the customers who buy templates may have a non-exclusive license to use them.
2. Territory. A license can be worldwide, or only for a specific region, country, or zip/postal code. If the contract is for an indefinite duration, you may want to the license to be universe-wide, since we don’t know where we will be located in the universe in 100 years.
3. Use. Licenses can be for all uses, or can cover only certain uses, such as displaying online, selling at a trade show, or using in a particular motion picture. For example, you may license someone to publish your book electronically in the United States, but not to sell print copies or to sell any copies outside of the USA.
4. Attribution. Licenses can include requirements to attribute the author or source of the materials, and include specific requirements regarding the manner of use. This is common in trademark licenses, which must require specific rules for displaying the trademark with the “registered trademark” symbol, in order to maintain trademark validity.
5. Derivative works. Can someone take your copyrighted work and use it to create other works? A common example is using a short sample from music to create another musical piece.
6. Confidentiality. Especially common in trade secret licenses (since it is required), a licensee may be required to keep what’s licensed secret, or even to keep the terms of the license agreement secret. These types of licenses will be combined with a non-disclosure agreement (NDA).
7. Time frame. A license can last forever, or it can be created for a specific time frame. You may also license with renewable terms, such as a five-year license that can be renewed in one-year increments.
8. Termination. The termination clause will state under what conditions the license can be terminated, and will specify the process for termination. For example, it may provide that if one or both parties materially breach the agreement, the other party may terminate with written notice and an “opportunity to cure” (an opportunity for the other party to fix the breach).
9. Assignment/transfer. Licenses can by default be assigned or transferred to another party, unless it is specifically restricted in the license agreement. A company who wants to sell their assets (since an exclusive license may be a significant asset) will want the ability to transfer, but the licensor may not want to do business with a new person that they didn’t approve.
10. Payment/royalties. There are many payment schemes available for license agreements. Some licenses (especially cross-licenses) may have no financial payment. Licenses can be paid flat-fee, a percentage of sales (royalties), or a periodic fee (such as an annual payment). Percentage of sales can be based on gross revenue, net revenue, or profits. It is very important to be specific when you specify the basis for the royalty.

If licensing is an option for you in your business, do be sure you put a comprehensive agreement in place from the start to help keep these business relationships running smoothly.

ABOUT THE AUTHOR: Linda M. Lopeke, Founder of SMARTSTART, helps entrepreneurs, experts and professional services providers rise above the noise, make competition irrelevant and join the 1% who succeed in business online.

She also leads a $50M philanthropy program that helps digital business owners build their dream with access to world-class expert professional guidance made possible through corporate sponsorship. Learn more about this innovative program and apply here.