Royalties are a percentage of net sales (gross sales minus costs for taxes, freight, insurance, etc.) with a minimum annual payment. Royalty percentages vary from 1% to 20% (or even more). The percentage may be less if the invention is a component of a product— depending on how much your invention adds to the value of the total product. Many deals are not made because the inventor or Intellectual Property (IP) owner overvalues the worth of his invention. A manufacturer bases royalties on the future profits of the product for them. Many inventors feel they should be paid back for any investment they have put into their invention thus far and ask for unrealistic licensing fees and royalties. As a rule of thumb, royalties range from 1% to 5% of net sales although there is a huge variance among products and markets. What it really comes down to is what can the company expect to make from the invention, and what should be the inventor’s fair share.
An up-front payment may range from a few hundred to several thousand dollars. Once again this depends on the value of the property to the licensee and what profits the licensee can make from licensing the technology. Often the up-front payment is in the form of an advance on future royalties.
A guarantee of diligence or due diligence on the part of the company to bring the product to market with penalties if they don't comply ensures the company will make an honest effort to bring the product to market within a reasonable time frame and to promote sales of the product. In addition to financial penalties, there are usually conditions under which all rights to the invention revert back to the inventor if the terms for diligence are not met.
An exclusivity clause gives the company sole rights to commercialize the invention. This is usual, but not necessary. In some cases, licensing agreements may be signed with more than one company, particularly if the market can be divided into exclusive parts. These agreements would be non-exclusive or exclusive exclusive to a certain field or industry. For instance, a technology such as a disposable syringe, could be licensed by a company for exclusive rights to the medical industry. Another company could license the rights exclusively to the mainstream consumer market.
Another option with exclusive licensing arrangements is to include a sublicensing clause. This allows the licensee to re-license the technology to other companies to increase sales and royalties.
The term of the agreement is how long this licensing arrangement remains in force and how long royalties are paid. Many companies prefer the agreement to last the length of the life of the intellectual property, usually 17-20 years or less depending on when the IP was issued. Others prefer a shorter term with option for renewal each year thereafter.