Have you thought about licensing your business’s intellectual property? It can be one of the best ways to scale your business! Since there’s a wide variety of types of licensing agreements, it’s imperative to get a good understanding of what types exist, and which might be most beneficial to you.
In this blog we’re covering the basics of what a licensing agreement is, different types of licensing agreements, and important details to include. Of course, there are potentially many other details that might apply to your situation, but this blog is a great place to start.
What is a Licensing Agreement?
In a nutshell, a licensing agreement is a contract that allows one party to use, sell, or distribute another party’s intellectual property. This could be a product, brand, methodology, or other copyrighted property (like software or photographs) that you or your business owns.
The party that owns the intellectual property (or IP) is called the licensor, and the party using it is called the licensee. A licensing agreement is financially beneficial to both parties, as it is a paid agreement to the licensor that also allows the licensee to make profits from its use of the licensed IP.
Perpetual Versus Set Term Agreements
One of the first considerations for licensing agreements is whether the term of the agreement will be perpetual or for a set amount of time.
A perpetual licensing agreement is one that grants the licensee use of intellectual property forever. One of the most important things to remember if you want a truly perpetual agreement is to ensure that it’s irrevocable. Otherwise it has the potential to be revoked at any time, not making it truly perpetual.
For licensing agreements that are for a set amount of time, the licensee is able to use the intellectual property for the term set forth in the agreement. It may or may not be renewable at the end of the initial term.
Exclusive and Non-Exclusive Licensing Agreements
Another important aspect of your licensing agreement will be determining whether the license is exclusive.
An exclusive licensing agreement is only allows for one licensee to use your intellectual property within the parameters agreed upon in the license. This is an especially good option if you’re the licensee in the agreement because it removes potential for any other competition.
Alternatively, a non-exclusive licensing agreement is generally more preferable as a licensor as it allows for multiple licensees to use the same intellectual property. This enables you to make money on licensing fees through multiple channels.
A good option for more of a middle ground approach is an exclusive agreement based on geographical regions. This can benefit both parties as it allows the licensee to have limited competition (none in their geographical area), while allowing the licensor the opportunity to have multiple avenues for revenue.
Payment options in licensing arrangements can also vary. Common forms of payment include one-time fees, recurring periodic fees, or a percentage of profits (also called royalties). Combinations of these payment structures are common as well. If you use cloud software programs to run your business, for example, you are most likely paying a recurring periodic fee to use the program for a set amount of time. And when you stop paying, your license to use the product ends.
Other Details to Consider
Although the primary considerations for licensing agreements include the payment process, length of time, payment, and exclusivity, there are other potential details that might be relevant to you and your business. For example, if you are licensing a trade secret, confidentiality is vitally important for maintaining your trade secret protection.
Feeling like you’re ready for a licensing agreement but not sure where to begin? We're here to help you make empowered, informed decisions for your business.
Reach out to our team and let’s talk about what kind of licensing agreement would be best for your business.