Updated July 1, 2020:

A product royalty agreement helps both inventors and producers of products. This is a type of agreement that an inventor or creator of a product will utilize when he or she is not capable or not willing to take on the task of manufacturing a product for sale. The inventor can enter into an agreement with a manufacturer to produce the product for a portion of the sales. This is a very beneficial option for many different parties.

What is a Product Royalty Agreement?

Also commonly known as a licensing agreement, a product royalty agreement is a document that is arranged between inventors and manufacturers. It provides the right of a manufacturer to create, produce, market, and sell a product for a certain period of time while paying a royalty to the inventor.

This arrangement is typically used when a producer, author, creator, or inventor licenses their content, product, or invention to other companies for production.

Creating a product is different than actually having the capability to take the product and produce it for sale. This is the reason many inventors turn to licensing agreements.

Before making an agreement with a licensor, certain preparations need to be considered. When you are the owner to the rights of any product, there is not always an automatic way to make any money from it without its manufacture and sale. You can do that yourself; the easiest route to this outcome is to license it to another organization that will complete that task on your behalf for a portion of the revenue.

Terms and Conditions of a Product Royalty Agreement

Your contract will outline all terms of your arrangement. It will include the following:

  • The name of the licensee as the manufacturer and the licensor as the inventor. This will include a short description of the invention, the patent number, in which territory it may be sold, the length of the arrangement, the royalty percentage, and the schedule of payments.
  • The grantor will grant the rights to the product to the grantee for use for a specified amount of time.
  • The grantor will establish that he or she owns the invention listed in the contract and will hold all the rights to enter a royalty agreement.
  • When signing the agreement, the grantor will agree to provide delivery of any necessary documentation for the property to the grantee for the term that is agreed upon.
  • If there is a breach, the grantor will agree to not hold the grantee responsible for damages, losses, or injuries as a result.
  • During the term of the agreement, the grantee agrees that all property that is included will maintain confidential.
  • Should there be a threat to the confidentiality of the property, the grantee will provide notice to the grantor and come to a conclusion regarding the breach.
  • If there is negligence on the part of the grantee that causes loss, injury, or damage, the grantee will hold the grantor without harm and work to seek a remedy.
  • The agreement will also list the royalty rates and how often they are to be paid.

There is not going to be a set royalty rate that will apply to all forms of products, but the 25 percent rule is used most commonly. This rule provides that you can typically receive around 25 percent of the profits made when your product is sold. If the profits increase, so does your income.

Another rule used is the 5 percent of net rule. This means you can make up to 5 percent of the selling price after cost. The costs include manufacturing costs, advertising, delivery, and administrative costs. This can result in a smaller royalty than if you had only estimated deducting the cost of materials.

The royalty percentage will be a combination of the percentage of royalty, the raw cost of the product, the amount of the product sold, and the timeframe of the contract. A smart licensor will consider all of this at the beginning of searching for products to manufacture before making a huge investment into a product to sell.

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