Negotiating a licensing agreement takes time--more time than you will want it to. Every deal is unique, but in my experience, the negotiation process is largely the same. If you're an independent product developer, you may feel like you're at a disadvantage when it comes to negotiating with a powerful company. But I strongly believe that doesn't have to be the case.
Follow these steps to get the best agreement possible.
1. Do your homework. Before you begin negotiating, you need to understand your licensee's business. What are the company's strengths? What are its weaknesses? What does it sell? How much? Where? Do big-box retail stores, convenience stores, and/or specialty stores sell its products? No company does it all. Of course, that doesn't mean the company won't ask for everything. The more insight you have, the more you will be able to negotiate from a position of strength. Knowledge is power.
2. Start with a term sheet. If you can't agree on the big picture, you'll never be able to work out a contract. Does the company want an exclusive? What about territories? Royalty rate? At this point, you are feeling each other out. Are you going to be able to work together? Only after you've both agreed to a broad set of terms should you start hammering out a contract.
3. Manage your expectations. Contracts are ugly. They address everything that could go wrong. If you aren't familiar with how they're written, you may become upset when you receive yours--like I once did. Don't freak out.
4. Be patient. Like I said earlier, negotiating a licensing agreement is a lengthy process. Try to accept that. There are so many aspects to negotiate that you simply cannot address all of them at once. I recommend starting with the easiest aspects first in order to get some momentum going. Later on, when you're both worn out and looking forward to the process being over, it will be easier to get your licensee to say yes. At that point, the company has already invested its time.
Really, time is on your side. You need it to think things over. Be wary of companies that try to pressure you to sign a contract quickly.
5. Have a win-win attitude. Be a team player. If you can find a way to stay positive during the throes of conflict, people will want to work with you. And that's important, because after the contract is signed, there's a good chance you're going to be working with the very same people you've been debating back and forth with. Set the tone from the very beginning by declaring that you're committed and looking forward to making your partnership work.
6. Don't lose your sense of humor. You will need it!
7. Remember to hold something back. You're not going to get everything you want, but if you concede too much too early, you may end up sacrificing more than you feel comfortable with.
8. Put yourself in their shoes. Don't forget that the company is going out on a limb. It's taking on risk.
9. Pick up the phone more often than less. Email has its limitations. If there is an aspect of the contract I think needs more discussion, I don't hesitate to call and tell the company my concerns. If I'm lucky, they'll agree to put the language I want in the document right then and there. That's the benefit of using the phone. Doing this has worked amazingly well for me in the past.
I negotiate my own licensing agreements because I enjoy doing so and have a lot of experience with them. But before I ever sign one, I always have my licensing attorney review it to ensure there isn't anything I've missed.
If you're new to the licensing lifestyle and have never negotiated a contract, I highly recommend hiring someone to help you out. Someone with experience will know to remain calm when you feel like pulling your hair out!
And remember: There is no such thing as a perfect contract.