How to Negotiate License Agreements

Preparation

• 1). Review intellectual property law that applies to your product. If you are licensing software, for example, you should know that software is generally protected by copyright law rather than patent law, that software copyrights attach as soon as the code is written, and that resale rights will have to be expressly granted in the license agreement if your licensee wishes to license your software to third parties.
  
  
• 2). Determine whether you want to grant an exclusive or non-exclusive license. Exclusive licenses command higher royalties, but can only be granted to one party at a time. Depending on the nature of the product you are licensing, you might make more money by granting non-exclusive licenses to multiple parties.
  
  
• 3). Determine whether you want to grant a temporary or perpetual license. If you grant a perpetual license, you might be better off demanding a lump sum payment, because periodic royalty payments on a perpetual license would be impractical. Calculating the amount of a lump sum payment will require you to estimate the present value of future royalties in order to calculate the total value of the license.
  
  
• 4). Determine the scope of the license you wish to grant. A license grant may be worldwide or limited to a defined geographic area, such as California or the United States. If you are licensing the use of an e-book, you might want to grant only English language rights to the content.
  
  
• 5). Download a sample license agreement for a product similar to yours, and use it as a guide to draft a licensing agreement that is consistent with your desired terms (see Resources section). The purpose of this exercise is to strengthen your bargaining position by entering negotiations with clear goals, and to present your negotiation demands to the other side in written form.
  
  
• 6). Research a large number of companies whose lines of business suggest that they might be interested in your product. Contact a few of these companies with information about your product, and offer to negotiate a license agreement with them.
  
  

Negotiations

• 1). Present your draft license agreement to the other side. The other side will probably present you with their draft. The differences between these two documents will serve as the agenda for the negotiations.
  
  
• 2). Negotiate the price and payment terms. Your strategy should be to demand a higher price than you expect to receive, and then offer a discount in exchange for a concession by the other side on some other term. If you are offering a temporary license to a reseller, consider insisting on royalties based on sales volume rather than a lump sum payment, as long as you are confident in the company's marketing ability and long-term financial position.
  
  
• 3). Negotiate the supplementary terms of the agreement, and have your attorney check over the final draft of the agreement.
  
  
• 4). Walk away from the negotiating table if the other side fails to agree to acceptable terms, and continue negotiations with another company.