Advice on upfront payment or advances in licensing agreements

pupcentric

Hi,I`m new to SuN and wanted some advice "upfront money" or "advances on royalities" when
negotiating a licensing agreement. Here is my situation:I`ve
been approached by a
leader in the home textile industry who wants in on the rapidly growing
pet industry, however we have been in discussion
for about a month now and still nothing on paper.  Last week I asked
the president of the company if upfront payment or an advance on the
royalites were a possibility and he flat out stated NO.  He claimed it
wasn`t common unless you were famous blah blah blah. I informed him
that inital money was needed to further my designs and complete the
30-40 initial product line, didn`t budge and stated they were going to
put a lot of money in manufacturing.  However, I`ve been reading on SuN
and this
article made it seem like I was in the right to ask about this:
http://www.startupnation.com/pages/articles/AT_Licens ingAgre
ementKeys.asp What has been your experiences and what do you think of his reaction?

pepperlegal

How IS the company proposing to pay you?

pupcentric

The company is proposing I receive royalty checks every quarter based on a percentage of the gross sales (the details of the percentage have not been worked out yet).  However, the product line will not go to market until October and the first quarter that would reflect sales would be Jan I suspect, therefore I don`t think I would receive my first royalty check until March/April 2008.  Do you agree with that guess?

pupcentric

I had leads that I let get slightly cold, my attorney is following back up some of those leads, it was only a month since the inquiries started. About 6 weeks ago my attorney is a part of a huge business oriented law firm and just sent out an email to his associates telling them about me needed help with manufacturing and the emails started rolling in. So many people are looking for an in into the pet industry right now. So to answer your question nhgnikole, I can have other places to take my products, they just have to be heated back up So I have no problem with walking if the contract isn`t what I want.

MichaelB

I work in this everyday.  To me approach is everything.  The justifiable reason I ask for upfront monies is in regards to the amount of monies expended to get your product to where it is today such as money paid for IP, out-of-pocket development, prototypes, samples, travel, time & effort, etc.  To me this is justifiable and there is never any set number.  It comes down to what you can negotiate with this company.  But let me remind you of this, although, the upfront money is great it`s not what makes you money.  You make money on negotiating a reasonable royalty rate beneficial to both you and the licensee.  Will it take time for them to ramp up manufacturing and get the product into the pet arena?  Yes, however, once this is accomplished and if this company has the strength to get the product into the mass retail, the royalty rate becomes a very true figure and this is where you will see the success of your due diligence.  So some parting words of advice....Negotiate what you can on the upfront money but dont let pride or ego get in the way of giving your product a chance to succeed in the marketplace.    I would also hesitate on having your attorney negotiate any license agreement until just that, you recieve a contract, then let the attorney take a look at the paperwork.  Getting attorneys involved from the start means, that they are going to get their attorneys involved and nothing ever comes of anything and no one wins.  I would find someone who is a good negotiator and who is a reasonable man of ethics and is looking out for your goals and aspirations to get this done for you.

drvag

Jamye,  every point that MichaelB made is excellent and right on target. 
I`ll piggyback on his point.  I would focus more on the long term royalty stream.  I would use the fact that you have 30 - 40 more designs in your bag as leverage.  Possibly even to ramp up the % paid based on other successful designs that you have provided them.
Best of success!
 

pupcentric

Thank you for the advice.  To clarify, the upfront money is for operating expenses to keep my nose above water until the first royality check comes in. To me it seemed appropriate to ask for upfront money if the licensee wants a 40 item product line while I only have 2 in my current "catalogue".  It was only expanding my colors and patterns, but that takes lots of time and money. So when the licensee didn`t want to help buffer all my expenses with a small amount advance I felt they weren`t serious about pursuing the license. 
pupcentric2007-6-11 10:59:56

drvag

Jamye, if you do have other options and they will not offer you an agreement that you feel is a win-win, then do as nhgnikole said, and walk to the next one.
But if this company is the only real option, and this is becoming a deal breaker,  maybe you could tailor your needed upfront money as an advance against royalties.
If the deal goes south and no other real licencing options, what next?

Reesecup

I have a question regarding getting an investment company to help pay for the patent fees. What paperwork is usually necessary to request funds from an angel investor to help with the legal fees for the invention? Will I need a business plan? The business plan that I have is worded to start a business, but I`m interested in licensing my product. Please advise.