Which method is best for your particular invention and goals? There is no "correct" answer. These different options will affect not only how you earn money, but also how much financing you will need in order to proceed.
Your success at either method will likely depend on your personality, capital investment, and perhaps most importantly, the time that you are able to commit to running a business yourself.
Whether you choose to license your invention or market and manufacture it yourself probably depends on your personality, skills, and interests.
Your decision will no doubt be influenced by the nature of your invention. Certain innovations, because of their complexity, scope, or exorbitant cost of production, readily lend themselves to licensing.
For example, if you design a new piece of industrial machinery, you might not have the money or factory space to easily mass produce it. Licensing or selling that same idea to a company that's already prepared to undertake such an endeavor might yield better results, unless you have the financial capital to invest in your own operations.
Often, however, the decision to license is based more on the person than on the particulars of the invention. You must objectively examine your inventing personality. Is your goal to build a company? Do you have the time to find investors, lease factory space, and market your invention to buyers? The answers might inform your decision.
Licensing or assigning rights to your invention is likely to be a simpler, less expensive route than manufacturing and selling it. Licensing or assigning your invention is often preferable for inventors who want to make money, but care primarily about innovating and spending time in the office or lab. These types of inventors are generally unwilling to undertake all of the business-related tasks involved in developing, manufacturing, marketing, and selling an invention.
To license or assign your invention, however, you actually need something to license or assign. This is where patent law often comes into play. Inventors must have some sort of intellectual property protection over their invention, which another person or entity would buy (or "rent"). To state the obvious, if you do not have an exclusive right over your invention, why would someone else pay you for the right to manufacture and sell it?
How do you obtain a patent over an invention? Most inventors will apply for a utility patent, or more likely, a provisional patent (which confers limited initial rights more quickly than a full patent).
What is a license? A license is simply an agreement by which you let someone else commercially use or develop your invention for a period of time. In return, you receive money, usually either a one-time payment or continuing payments called royalties. As the owner of the invention, you are the "licensor" and the party receiving the license for your invention is the "licensee."
Advantages of licensing. What makes a license appealing is that the licensee assumes all the business costs and risks, from manufacturing to marketing to attempting to stop people who infringe on the product's patents. Depending on the specifics of the agreement, the inventor/licensor might need only to sit by the mailbox and wait for the quarterly royalty checks.
Disadvantages of licensing. While licensing means less work, it can also mean less profit. The entity that accepts the risk of mass producing and selling your product will likely claim a much greater percentage of the revenue. Moreover, by licensing, you lose control over the execution of "your" idea. This could mean watching the licensee bungle its approach to the product, which can be emotionally painful for you.
Chance of licensing success is low. Unfortunately, finding someone to license your invention can be a struggle, unless you have a connection to an entity willing to manufacture your product and undertake the built-in risk. A study by Edward Zimmer and Ronald Westrum revealed that only about 13% of inventors who attempted to license their invention were successful. (This data was based on people who responded to the study, which probably skews the percentage positively. Those who were unsuccessful were probably less likely to respond at all.)
How to license your invention. There are several steps to successfully licensing your invention. First, you must find the right people to review your idea and ensure that it has appeal. Second, you must raise the money necessary to develop and protect your invention, such that it can be licensed in a complete form to a third party. Third, you must present your invention to a licensee in a marketable fashion, including any necessary instructions or support.
Assigning rights to your invention. An inventor-for-royalties can assign all rights to the invention for cash. Unlike merely licensing your rights, an assignment is permanent. How does assignment work? An assignment is a permanent transfer of ownership rights. When you assign your invention, you are the "assignor," and whoever purchases the rights is the "assignee." An assignment is like the sale of a house, after which the seller no longer has any rights over the property. As the assignor, you may receive a lump sum payment or periodic royalty payments.
Is it an assignment or a license agreement? The terms "assignment" and "license" are sometimes used interchangeably. And sometimes, these two types of agreements seem to have the exact same effect, as in the case of an unlimited exclusive license, in which a licensee obtains the sole right to market the invention for an unlimited period of time. For this reason, you or your attorney must examine the specific conditions and obligations of each agreement to determine whether it is an assignment or license, rather than simply relying on terms such as assignment and license.
For those who place considerable weight on the entrepreneurial side of the scales, the financial reward of a license or assignment may seem unappealing. Royalties often range from 2% to 10% of net revenues. Such inventors often choose to form a business and to manufacture and market the product themselves. Of course, this will require considerably more financial input than licensing.
What is your chance of success? The study by Zimmer and Westrum mentioned above revealed that nearly half of the inventors who decided to take control of producing and marketing their invention claimed to be successful. That may be because an inventor with a strong entrepreneurial drive is obsessed with growing the business and thrives on challenges; for example, how to manufacture the invention efficiently, how to acquire distribution, how to market to target audiences, and how to eke out a profit from retail sales.
Advantages and disadvantages of marketing and manufacturing your invention. The financial rewards are potentially much greater if you are willing to undertake all of the investment in manufacturing and producing your invention. This is precisely why it appeals to more entrepreneurial inventors who are willing to be CEOs of their own little companies. On the negative side, manufacturing and marketing are incredibly risky, and can cause tremendous anxiety and engulf your life, not to mention your savings, more than you might wish.
]]>But many artists also make money through licensing, allowing their images to be reproduced by other people or entities in exchange for royalty payments. In many cases, this allows artists to have a stream of income without requiring them to continue producing new original works.
Not all royalty deals are created equally, however. Negotiating a good royalty deal when licensing your artwork is critical to maximizing profits. Before signing on the dotted line, learn the basics of royalty payments and take the time to negotiate a contract that works for you. And then, once the deal is signed, keep a close eye on the vendor to catch any shortfalls in your royalty payments.
When you license your artwork, you retain legal ownership of the work. This means that you keep your copyright or design patent, while someone else makes and sells the item (for example, duplicating your imagery on merchandise).
In return for granting the license, you receive a royalty, which is usually either a lump-sum payment or a continuing payment (on a monthly or quarterly basis), based upon a percentage of the income from the licensed artwork.
Imagine that you have just created a beautiful painting of a dog. A pet store comes to you saying it would like to print that image on T-shirts, which it will then sell. You could likely negotiate for a percentage of the sales of each T-shirt over a certain period of time. For example, you might keep 20% of gross revenue. The store, which undertook the cost of production and sales, would retain 80%. To state the obvious, you would seek as high a percentage of revenue as possible from licensed products.
Note that it's also possible to "assign" your copyright in the work. In other words, you could "sell" your intellectual property ownership interest to a buyer, such as the pet store, which would then be able to do whatever it pleased with the dog painting. The store might offer a larger lump-sum payment, but you would not see any of the royalties from later sales.
Regardless of whether you license or assign your copyright, the agreement should be in writing. Having a written agreement will ensure that both sides understand their respective obligations and responsibilities, hopefully bringing clarity to the relationship.
Like many legal areas, licensing involves a good amount of jargon. The key to negotiating payments in a licensing deal is to understand the terminology used in the agreement. Below are some definitions.
An "advance" is an up-front payment to you, usually made at the time the license agreement is signed. An advance is almost always credited or "recouped" against future royalties, unless the agreement provides otherwise. The person or entity you're contracting with is essentially saying, "I expect you will earn at least $1,000 in royalties, so I am going to advance you that sum at the time I sign the agreement."
When you start earning royalties, the licensee (the company that licensed the artwork) keeps the first $1,000 to repay the advance to itself. If the artist does not earn the $1,000 in royalties, the licensee takes a loss. You do not have to return the advance unless you breach the agreement. Thus, an advance gives you some degree of security, since it puts money into your pocket immediately.
On rare occasions, a licensee may pay a "one-time license fee" at the time of signing the agreement. This differs from an advance in than it's not deducted from royalties. It's simply a sum of money, usually given instead of any payments down the road. This sort of deal can be good for you if you believe the product being licensed might not actually sell well, since you can put money in your pocket immediately. But if it does sell well, you might feel foolish for having given up the income stream.
"Gross sales" refers to the total amount billed to customers who buy the product containing the licensed artwork. "Net sales" are usually defined as the licensee's gross sales minus certain deductions. In other words, the licensee calculates the total amount billed to customers and deducts certain items, such as the costs of goods, before calculating and paying the royalty.
Deductions are subtracted from sales before the royalty is calculated. It is ordinarily acceptable for a licensee to deduct from gross sales any amounts paid for taxes, credits, returns, and quantity discounts made at the time of sale. It is also not unusual for a licensee to deduct shipping (the cost of getting the products to the buyer). While you may not see the significance at first, deductions are 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 would receive from a 5% royalty rate from which various licensee expenses are deducted.
If possible, avoid deductions for:
If it is difficult to negotiate individual deductions with a licensee, consider setting a fixed percentage for deductions, say 10%.
Determining your royalties is important, partly because you need to ensure that the licensee is paying you correctly. This means you must do your own calculations. Here is how your agreement might specify that royalty amounts will be calculated.
Royalty rates. Royalty payments are computed by multiplying the royalty rate against net sales. For example, a royalty rate of 5% multiplied by net sales of $1,000 equals a net sales royalty of $50.
Royalty rates for licensing vary depending on the artwork involved. Below are some royalty estimates, though note that these vary considerably depending on the size and resources of the company with which you are negotiating:
Per unit royalty. In some cases, an artists may negotiate a "per unit royalty," which is tied to the number of units sold or manufactured, not to the total money earned by sales. For example, under a per unit royalty you might receive $.50 for each licensed product sold or manufactured.
If the licensee that you are approaching is especially excited about your artwork and wants a long-term license, you may want to consider negotiating for a guaranteed minimum annual royalty payment ("GMAR").
With a GMAR, the licensee promises to pay you a specific amount, usually at the beginning of every year, regardless of how well the merchandise sells during the year. At the end of that year, if the earned royalties exceed the GMAR, you would be paid the difference. If the GMAR exceeds the earned royalties (you were paid more than the product earned), the licensee usually takes a loss (unless the licensee has negotiated to apply the difference to future GMARs).
To a certain extent, artists are trusting the licensee to accurately pay them for royalties based on sales. But how do you know that they are selling the number of products claimed in a given year? In your agreement, you should include an audit provision so that you can detect and quantify a possible shortfall in your royalty payments. The provision should:
You should also ask for an attorneys' fees provision in your licensing agreement, so that in the event you must sue the licensee for royalties or audit costs, any court judgment would include your legal fees.
Finally, remember that it does not matter what royalty rates or other provisions you negotiate if the people you're dealing with are crooks (or broke). Always research the companies with whom you contract. Due diligence before you sign an agreement can save much grief.
For information about licensing fine and graphic arts, see Getting Permission: Using and Licensing Copyright-Protected Materials Online and Off, by Richard Stim (Nolo).
]]>The artist-seller remains the owner of the goods until they are sold, at which time the store is entitled to a percentage of the proceeds. This allows artists to sell their work without the expense of a large brick-and-mortar store, and it allows stores to have inventory without buying large quantities of goods that may never sell.
However, consignment arrangements are not without their legal and financial risks for artists. For example, what happens when your work is damaged? Or when the store that holds your goods ceases operations?
There are three types of legal protection for consignors: (i) the Uniform Commercial Code (UCC); (ii) state consignment laws, and (iii) written consignment agreements. You may, however, find some of the laws difficult to comprehend, inconsistent, and expensive to enforce. Below is a brief summary of these legal protections.
The UCC is a comprehensive set of rules governing the sale of goods and other commercial transactions. Every state has adopted a version of the UCC, and while there are important differences among the states, most of the basic norms are the same. Parts of the UCC serve to protect and regulate consignments, among other commercial sales.
For instance, under the UCC, if damage to your artwork results from the gallery's negligence, the gallery must pay for the loss. If the damage is not the direct fault of the gallery because of an event such as a flood or a fire, the gallery may or may not be liable, depending on how the courts in that state interpret the UCC.
The UCC is not always so helpful, however. Under the UCC, if a gallery files for bankruptcy pursuant to the U.S. Bankruptcy Code, the gallery's creditors can seize your consigned goods as payment for the gallery's debts! In other words, anyone owed money by the gallery can take your crafts as payment. You must stand in line behind the other creditors in bankruptcy court and hope that the judge awards you some compensation for your consigned goods.
You can avoid this unhappy outcome by fulfilling one of following three requirements under the UCC:
Although artists rarely follow these cumbersome UCC requirements, you may find it worthwhile. This is particularly true if you are consigning high-ticket, one-of-a-kind craft items. The filing creates a lien (a legal claim over property) elevating you to the level of a "secured creditor" and putting you at the head of the line in bankruptcy court. If you do file the form and obtain the lien, you must remove the lien at the time of any sale.
Having the store or gallery post a sign, the second UCC requirement, may seem like an awkward request, but more and more stores and galleries are complying with such requests. Include a requirement in your consignment agreement that the gallery post a notice such as "Crafts at this gallery are sold under the terms of consignment agreements." As noted above, this may not be effective in all states.
Most artists would find the third requirement difficult to accomplish, since it requires proof that creditors of the gallery were aware of the consignment. Some consignors have accomplished this requirement by sending the creditors a copy of the consignment agreement. As you can imagine, the average artist, who does not know who the creditors are and who may not have a written consignment agreement, would find this impractical.
Because the UCC requirements can be a tough fit for the artist culture, many states have passed special consignment laws to protect artists from gallery abuses and bankruptcy. So far, 31 states have passed art consignment laws: Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Florida, Georgia, Hawaii, Idaho, Illinois, Iowa, Kentucky, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Montana, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Ohio, Oregon, Pennsylvania, Tennessee, Texas, Washington, and Wisconsin.
Most of these state laws provide a shield from a consignee's bankruptcy by eliminating creditors' ability to seize consigned goods. In reality, enforcing these laws usually requires hiring a lawyer and filing claims in bankruptcy court. This process can be expensive, sometimes more expensive than the value of the artists' goods. Moreover, many of the state laws require a written consignment agreement as a condition for enforcing the law.
Determining whether your artwork qualifies as "art" under state laws can be confusing. Many state consignment laws apply only to "fine art." Fine art is traditionally defined as a painting, sculpture, drawing, graphic art, or print, but not multiples. Some states, like Arizona and Ohio, specifically include crafts under consignment laws (defining them as any work made from clay, textile, fiber, wood, metal, plastic, or glass).
Traditionally, most artists have used oral agreements to establish consignments. Instead, you should insist on using a written consignment contract, since it can provide benefits for you, obligations for the gallery, and, most importantly, is required under many state's consignment laws.
Your consignment agreement should include:
Also, if possible, include an attorney fee provision (saying that the loser in a lawsuit pays the winner's attorney fees) and an arbitration provision (requiring settlement by a private arbitrator, not a judge). These provisions create incentives for rapid settlement of all (non-bankruptcy-related) disputes.
A written agreement provides practical benefits, but using common sense and your business radar provides the best protection. Ask other artists about their experiences with specific stores and galleries. Avoid large orders until you have built a level of trust with an unknown shop. Ask the store for references from other artists.
Asking for this sort of agreement might seem overly formalistic for an arts-related endeavor. But by discussing and clarifying these important points prior to giving over your work, you will sidestep many potential landmines.
Take care of the legal and business side of things now, so you can focus on creating your crafts. For help sorting out the legal issues involved in the ownership, protection, and transfer of visual artworks, get Protect Your Rights as an Artist by Richard Stim (Nolo).
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