What factors influence royalty rates in technology license agreements?

According to a white paper written by Howard Johnson, the guiding principles of royalty rate negotiations are “economic fairness” to both Licensor (the IP owner) and Licensee and that the resulting revenue stream should reflect the value received by the Licensee from the Licensor over the term of the license agreement.

Product factors that affect royalty rates:

  • the competitive advantage of the products to be licensed products;
  • the scope and remaining life of any licensed patents relating thereto;
  • the licensee’s right to ongoing technology and product improvements;
  • the market size and potential in which the Licensee will sell the licensed products;
  • the degree of complexity in the sale of licensed products and the extent customization is required;
  • the ability of the Licensee to sublicense.
Licensor factors the affect royalty rates:
  • the Licensor presence in its own market (brand acceptance, reputation, financial stability, etc.);
  • the level of commitment to the licensed products, including future spending plans;
  • the technical, sales and marketing support offered.
Licensee factors that affect royalty rates:
  • the Licensee sales estimates relative to market potential;
  • an offering of guaranteed minimums;
  • an established sales presence and reputation in the territory;
  • the ability to offer product enhancements.