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Would you accept this licencing agreement? What would you do?

I am a very small, bootstrapped company that manufactures a consumer product called Lava Lunch- it is essentially an insulated lunch box that comes with two warmers that keep the food warm for several hours. I have an opportunity to license the product to a larger player in the field. This company is one of the three largest in the lunch box/cooler space.

Initially we had a verbal agreement where they would license the entire product (lunch box + warmers). However, now they want the contract to cover the warmers alone. Of course, (and this is my assumption) their thinking is that they already now how to make totes and don't need me for that. My thinking is that they will sell many hundred of thousands of additional units due to the inclusion of my warmers, and so royalties should be based on the entire unit.

If we proceed as their current proposal, my royalties would be less than half of what was initially thought.

So, I guess my question is: Is my thinking reasonable? And if so, how do you recommend proceeding?

Any advice is welcome.

Thanks!

29 Replies

William Zeitler
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William Zeitler Entrepreneur
Principal Law Offices of William Zeitler PLC
Your position is reasonable, but you need to protect your product as an IP right and license it that way. Have them recognize your rights in writing as a license so you have something to enforce in case they walk. Also spell out royalty amount and period of license. Good luck. Will Z Sent from my iPhone
Steve Getman
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Steve Getman Entrepreneur
Partner/CTO/CIO at Flash Point Communications
Is your product patented and/or do you have a non-disclosure/non-compete with the larger company? The answers to that affect how much leverage you might have.

I'd suggest attempting to negotiate a higher royalty rate for the warmers alone with the logic behind that being that you had negotiated initially under the assumption that the deal covered both products.
Robert Honeyman
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Robert Honeyman Entrepreneur
Financial Consultant at Michigan Small Business Development Center
It sounds like the negotiations started with you proposing a licensing fee based on their using your entire design, which they verbally agreed to. It seems they then came back and said, we don't need all of it, only the piece that makes this different. And because we're not taking all of it, we'll cut the licensing fee in half.

Close? It sounds like a negotiation. Was the initial amount your best offer? If not, now's the time to come back with a counterproposal. Of course, until you have an agreement in writing, there's always the risk they'll completely change their minds and walk away. Are you in discussions with the other competitors (assuming you haven't waived that right as part of the conversation)?

The question isn't so much what's fair as it is what makes business sense for you. What's your base price that you're willing to accept, and if you can't get that, are you ready to walk out the door? It seems to me that once you've established that, you can respond.
Angela Leaney
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Angela Leaney Entrepreneur • Advisor
Founder, The Bespoke CMO. Advisory Board Member & Advisor
I appreciate the fact that Robert Honeyman brought up the concept of business sense in place of fairness. Bravo. I would consider the role of this particular product in your overall success. Do you have other products or ideas in your portfolio? Do you see further work with this major lunchbox player? Or is this "it" for your company in the near term and you therefore have a specific financial or strategic imperative for this warmer? I encourage you to think this broadly. Good luck.

Mark Bradlee
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Mark Bradlee Entrepreneur
Former CEO BioSmart Sciences, Inc., Inc..
Melissa The retail market is brutal and if you are in a space "controlled" by a few big companies, it is even tougher to get any traction and the risks and capital requirements are staggering. My suggestion is to take the licensing deal and reap some rewards for your efforts, while being free to work on the next great idea Been to the alter many times and with I had cashed out of a few that I thought I should take all the way. Mark Bradlee [removed to protect privacy] (925) 699-8511
Melissa Maklan-Zimberg
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Melissa Maklan-Zimberg Entrepreneur
Founder, Elements Accessories Inc.
Yes, that's pretty much how it went. The produce is patent pending and we do have an NDA in place.

I am in initial discussions with a competitor but that's very early.

My initial proposal, that was verbally agreed upon, was what I consider a fair offer. Not too high, not too low.

Any additional thoughts?
Michael Feder
1
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Michael Feder Advisor
Founder and CEO at PrayerSpark; Finalist: Global Business & Interfaith Peace Award
Always helpful to negotiate these things with licensing experts...
Mark Bradlee
0
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Mark Bradlee Entrepreneur
Former CEO BioSmart Sciences, Inc., Inc..
No....Good luck. Mark Bradlee [removed to protect privacy] (925) 699-8511
Melissa Maklan-Zimberg
0
0
Melissa Maklan-Zimberg Entrepreneur
Founder, Elements Accessories Inc.
I don't really think I can get traction in the big box retailers. My initial intent had been to license for the mass market, and keep the high end to myself for online only. But the newest proposal essentially cuts the royalty in half.

It also makes things more complicated, because if the agreement is only for part of the product then it brings up questions of responsibility (legal and financial) of manufacturing, quality control, compliance, and accounting.

Does it make more business sense to have a flat fee per unit sold? And if the licensee is selling at a lower price in mass market, then I am essentially competing with myself, so perhaps it makes the most sense to offer the underlying patent for sale?

Thoughts?
Jim Falvey
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Jim Falvey Entrepreneur • Advisor
General Counsel & Advisory Board Member at Green Key Technologies
I concur with the advice and comments above. To reiterate a point, I would make sure that you have an attorney that understands licensing and protecting IP rights. I happen to practice in both of those areas, BUT, I'm happy to help find you an attorney in your area. Also, I'm happy to talk with you pro bono and give you my 2 cents. Feel free to email or call: [removed to protect privacy] or [removed to protect privacy]. Good luck!
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