Under a license agreement, you retain ownership of the legal rights to your crafts but, for a limited time, you “rent” these rights to someone else. That person or company then manufactures and sells the work. The “right” that you license may be a copyright, design patent, trademark or even trade secret used to create your work.
You benefit from licensing because you retain legal ownership of the work—for example, you keep your copyright or design patent—but someone else makes and sells the item. In return for granting the license, you receive a percentage—known as a royalty—of the profits. In addition, you may receive an advance payment secured by future royalties.
Example: National Jewelers licenses a design from Sarah and pays Sarah an advance of $5,000 against a royalty of 5%. National produces and sells $200,000 worth of the licensed jewelry. Sarah has earned $10,000 in royalties ($200K x 5% = $10K). However, National deducts $5,000 from Sarah’s share of revenue as a repayment for the advance. Sarah receives a $5,000 payment ($10K- $5K Advance = $5K).
In addition to paying royalties, the licensee ( the company making and selling the licensed goods) must meet licensing obligations including quality control, timely payment and accounting. If the licensee fails to perform according to these obligations, the licensor (the crafts artist) can terminate the agreement.
Below are some typical royalty rate estimates:
- greeting cards and gift wrap—2% to 5%
- household items such as cups, sheets, towels—3% to 8%
- fabrics, apparel (T-shirts, caps and so on), decals—2% to 10%
- posters and prints—10% or more.
These royalties are commonly a percentage of net sales—usually the total or “gross” income received, less quantity discounts and customer returns. Some companies, however, may deduct more sums from the income before paying royalties. This makes the allowable deductions virtually as important as the royalty rate in determining how much money ultimately comes your way. For example, a royalty rate of 2% of net sales with no deductions may earn you more than you’d get from a 5% royalty rate from which marketing, shipping, commissions and related expenses are deducted.
Always Check Out the Licensee
Every agreement is only as solid as the parties who sign it. Make an effort to learn about the licensee. Ask for names of other designers from whom the company has licensed works, and talk to them about their experiences with the company. Find out the company’s record regarding payments, credits and other issues that matter to you. Use the Internet to research any articles about the company—for example, check business websites to see if the company has been rated badly or has been the subject of lawsuits.
Do You Need an Attorney?
If you’re a savvy, confident businessperson capable of reading contracts, you can probably negotiate your own license agreement. Many licensors use an attorney for their first license but proceed on their own with subsequent agreements. Whether you need to use an attorney usually depends on the following factors:
- The parties. If the licensee is a large corporation represented by attorneys, you’ll probably need the assistance of an attorney.
- The quality of the license agreement. You’ll have less need for an attorney if the other side provides a concise easy-to-understand agreement.
- The work being licensed. If a company wants to license your best-selling or signature work, you may want to invest in an attorney’s help to give that work the extra protection it deserves.
- Your comfort level. If legal agreements just make you nervous, you might as well secure some backup and retain a knowledgeable licensing attorney.
If you see the word “assign” in the proposed license agreement, watch out. An assignment means that a craft artist is selling legal rights in a work to someone else—for example, if you were to sell your copyright in a fabric design. This is far different from the “rental” arrangement we’ve been describing. If you assign all your rights in a work, then that’s it—you can’t reproduce and sell that work any longer. There may be an occasion where an assignment makes sense—for example, sometimes you can assign all rights for the term of the license and they will be assigned back to you after it’s over, or you may receive a large sum of money for an assignment. Nevertheless, if the licensee seems to be angling for an assignment, have an attorney review the draft agreement to guarantee that you’re not permanently giving up all rights.