Licensing Artwork: Negotiating and Monitoring Royalty Payments

Royalty agreements are important for establishing clarity and ensuring fairness.

Artists need to earn a living. Some make all of their money by selling original work. They paint portraits, make sculptures, or design etchings, and then sell those to customers. But many artists also make money through licensing, allowing their images to be copied by another person or entity in exchange for royalty payments. Not all royalty deals are created equally, however.

Negotiating a good royalty deal when licensing your artwork is critical to maximizing your profits. Before signing on the dotted line, learn the ins and outs of royalty payments and take the time to negotiate a contract that works for you. And keep a close eye on the vendor, so that you can catch any shortfalls in your royalty payments.

How Royalties Work

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 (or duplicates your imagery on merchandise).

In return for granting the license, you receive a royalty, which is a continuing payment usually 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 would 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%.

Note that it is also possible to "assign" your copyright in the work. This might offer a larger lump-sum payment, but you will not see any of the royalties from later sales. For a more comprehensive discussion of the pros and cons of licensing artwork, see Should You License or Assign Your Art?

Understanding Licensing Lingo

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. Below are some definitions.

Advance against royalties. 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 are 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 who licensed the artwork) keeps the first $1,000 to repay the advance to itself. If the artist doesn't 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.

One-time license fee. On rare occasions, a licensee may pay a "one-time license fee" at the time of signing the agreement. This fee differs from an advance in than it's not deducted from royalties. It is 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 and net sales. "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. 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).

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'd get from a 5% royalty rate from which various licensee expenses are deducted.

If possible, avoid deductions for:

  • bad debts and uncollectible accounts (that is, when a third party orders products and then fails to pay)
  • sales commissions (a salesperson is paid a commission for each sale of the licensed product)
  • fees (a vague term that includes a wide range of licensee costs and business expenses), and
  • promotion, marketing, or advertising costs (these are costs of the licensee's business, not yours).

If it is difficult to negotiate individual deductions with a licensee, consider setting a fixed percentage for deductions, say 10%.

Computing the Amount of Royalties to Which You'll Be Entitled

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:

  • Greeting cards and gift wrap: 2% to 5%
  • Household items such as cups, sheets, towels: 3% to 8%
  • Fabrics, apparel (t-shirt, caps, decals): 2% to 10%
  • Posters and prints: 10% or more
  • Toys and dolls: 3% to 8%.

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.

Demanding a Guaranteed Minimum

If the licensee 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).

Auditing Your Royalty Income

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:

  • describe when you (or your representative) can access licensee records, and
  • provide that if the audit uncovers an error of a certain magnitude—commonly a sum between $500 and $2,000—the licensee will not only have to compensate you for the shortfall, but also for the costs of the audit.

You should also ask for an attorney 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 or the eGuide, License and Merchandise Creative Art, both written by Richard Stim and published by Nolo.

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