Royalties on manufacturing

Postby stay youth » February 6th, 2012, 5:15 pm


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Is it common practice for designers to get royalties on their designs? Example im working on a design and I have also been doing the sourcing for manufacturing, would it be unreasonable to ask for a percentage of the whole sale per unit cost? Since Im bringing the business to a company would I get a percentage from them and they would include this onto my client?

Any tips are super helpful

Thanks!
Mark

Re: Royalties on manufacturing

Postby Scott Bennett » February 6th, 2012, 6:11 pm

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Royalties from your client, yes, very common. Royalties from the manufacturer your client is buying from? That's usually done as a side deal and called a "kickback." That is often illegal, and usually unethical. It's certainly a conflict of interest- if you're getting paid by the manufacturer, you can't be counted on to provide objective work for that manufacturer's customer.

Re: Royalties on manufacturing

Postby stay youth » February 6th, 2012, 7:35 pm


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Haha I was afraid there would be a term for it, I will definitely not seek getting paid by the manufacturer. How are royalties usually set up with a client? Is a percentage of the wholesale unit cost, or percentage of unit sold? Hope this doesnt make me sound shady for asking!!!!

Thanks Scott

Re: Royalties on manufacturing

Postby Scott Bennett » February 6th, 2012, 10:47 pm

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Usually a percentage of wholesale revenue, if this is a wholesale business. So they sell $100k worth of widgets, you get $1k (or $5k or whatever). Royalty arrangements are most often in lieu of hourly or other compensation, so if you are already being paid for this work, your request after the fact to get a royalty on top of that is likely to elicit surprise.

Re: Royalties on manufacturing

Postby stay youth » February 7th, 2012, 12:09 am


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That makes sense and wont be doing it for this job but would like to try this in the future. Thanks again

Re: Royalties on manufacturing

Postby TaylorWelden » February 7th, 2012, 1:36 am

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Avoid at all costs.
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Re: Royalties on manufacturing

Postby nxakt » February 7th, 2012, 5:39 am

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Pursue it. Get some of the value you add and share some of the success. Not that easy or common, but when it works, it really works.

California graffiti artist David Choe will never want for spray paint again. As Facebook prepared for its initial public offering, much of the public speculation revolved around what it would mean for Mark Zuckerberg and other top executives who have millions of shares in the company. But the stock offering would mean millions for more unlikely figures. One was U2 singer Bono, whose venture-capital firm (!) had invested in Facebook. Another was Choe, who was once hired to paint murals on the walls of the company’s offices.

Because he took his payment in stock options, instead of a few thousand dollars in cash, he stands to reap an estimated $200 million. While Choe’s career had already taken off after his commission at Facebook, his “renegade’’ reputation may be finished if he starts, say, buying expensive baubles or funding super PACs. In any case, his experience offers some insight into how some people strike it rich: Part is working hard, taking risks, and making wise decisions. And part of it is being in the right place at the right time.

Re: Royalties on manufacturing

Postby Scott Bennett » February 7th, 2012, 8:55 am

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Yeah, I'd take a royalty option (almost) every time. Hourly billing design work is a really poor fit for the value it provides, because what we do is not repeatable by amount of time spent. I can pretty routinely do something in a day's work that will earn a million dollars over its life cycle. That's worth more than $800. And sometimes you sweat over something for weeks and it's a flop. That's not worth $20k. As long as you're not working for someone who's not going to screw you, which you shouldn't be doing anyway, and you can afford a little risk, there's no reason not to.

Re: Royalties on manufacturing

Postby stay youth » February 7th, 2012, 1:53 pm


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Hi All,

This is some great information. Im currently working with a lighting company on some small design but know that they could possibly generate some real good money and was curious how to benefit from that since its my direction. So ideally in the next round of negotiations I would like to approach them with the possibility of royalties. Can anyone talk about their experiences with this?

@Taylor Can you talk a bit more about your experiences or why you are opposed? thanks so much!!!

Re: Royalties on manufacturing

Postby TaylorWelden » February 7th, 2012, 1:54 pm

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Scott Bennett wrote:As long as you're not working for someone who's not going to screw you,


Individuals who come to an Industrial Designer thinking "I'll offer this guy royalties instead of actually paying him" are generally in the mindset to screw over people. Unless they're all in, and willing to pay you with their hard-earned cash, 99.9% of the time, they're trying to get work for free. Why else would they come to you in the first place offering royalties? The absolute simple and real answer is, so they don't have to pay you with their own money. They are hoping you will create these designs for free, and that they are so amazing, that they will profit from them. Only then would you get a little slice.

And if they do hit it big, guess who the first one they'll forget about will be?

For it to work, you're going to need...
A) An extraordinary amount of trust (we all know best friends and family members even screw each other over out of millions).
B) An extraordinary amount of luck.
C) To put in a lot of your valuable time into work which you may never get paid for (this is called risk, which you are taking with a faceless company whom you've never worked with before).
D) A great team of high-paid lawyers to fight for you (that is, if the product is a multimillion dollar success and you are owed a large piece of that pie, otherwise, the lawyer fees won't be worth it).
E) Quite a bit of experience with royalties negotiations from previous clients.
F) To hope that this company is successful at the hundreds of other issues with actually running a business, not making one simple mistake to tank the business (accounting, shipping, manufacturing, marketing, branding, pricing, distribution, sales, etc). It is very easy for a company to mess up and go under.

The odds are not in your favor. The house always wins.
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Re: Royalties on manufacturing

Postby TaylorWelden » February 7th, 2012, 2:03 pm

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Even if you do agree to receive 7% of all wholesale revenue... how will you get those factual sales #s? You can't walk into that company next Tuesday and just grab their sales book to make sure the #s they have told you are legit. You're going on what they decided to tell you. Sure its illegal. But if they're in a tight spot, it's easy for Dave in accounting to tell you that 7% of the wholesale revenue for this year was only $1,200 instead of $120,000. Just print off a different report. Done. Now the company doesn't have to let go of 2 or 3 employees.
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Re: Royalties on manufacturing

Postby nxakt » February 7th, 2012, 5:35 pm

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And yet it works.

I look at it in the opposite direction, in theory. If a manufacturer will not share some of the potential success of a project with you, from the incremental value that you add, then the design negotiation was not optimal. In practice it does not apply to all jobs. Some design work is just work.

Scott Bennett wrote:Hourly billing design work is a really poor fit for the value it provides, because what we do is not repeatable by amount of time spent. I can pretty routinely do something in a day's work that will earn a million dollars over its life cycle. That's worth more than $800. And sometimes you sweat over something for weeks and it's a flop.


Well put Scott. Some projects you get pitched have a dubious future from the beginning, other projects you realize from the onset that you are going to add a serious multiple to the sales quantity with your unique efforts. Try to balance the risk and the reward. Establish a history of adding value and be able to sell that to the client.

A mix of up front payments (skin in the game) and success percentage reward over time is the ideal.

Re: Royalties on manufacturing

Postby stay youth » February 7th, 2012, 6:50 pm


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thank you Taylor for your honest opinion and your right that we as designer are often undervalued. Have you had some experience that you can talk about regards to this? For one of my clients I know that without projecting too much that what im designing will definitely boost their sales and I would ideally like to be part of that success since its my design and my abilities to source manufacturing. Im currently working with a lawyer to help write up a formal contact to address these issues. Honestly I feel as a designer as Scott was saying I charge 3k for a product that makes a company 400k, my hourly rate doesnt accurately reflect the outcome.


@NXACT can you talk about some of your experiences? Did you have a contract agreement that stipulated an upfront lump cost and a percentage of royalties?

Thanks!

Re: Royalties on manufacturing

Postby nxakt » February 7th, 2012, 7:01 pm

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It is something you negotiate before everything starts. It cannot be done afterwards. It is better if you have a track record of adding value and a company that has the right spirit of risk reward.

Everything we design is intended to boost sales, nothing unique about that. It is about who assumes the risk. If they are paying all the bills and paying what you asked for, as well the full business costs, then there is no risk on your part. You get to enjoy seeing the success of your design succeed, hopefully. If you structure your next deal so that you can share risks, it is easier to ask for a reward.

Re: Royalties on manufacturing

Postby TaylorWelden » February 7th, 2012, 8:40 pm

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stay youth wrote: I charge 3k for a product that makes a company 400k, my hourly rate doesnt accurately reflect the outcome.

Charge more than 3k if the outcome will be so high for them, explaining this to the company. Its an investment on their behalf. They don't believe in the product at all if they're not willing to pony up some payment. Sure, they hope it will work so they "make millions", but they still have jobs if it doesn't, no big deal, next project, find another Industrial Designer who takes the royalties agreement bit.

I have no firm statistic to say it doesn't work X amount of time. But you can be sure the odds are against you. I've been offered equity and/or royalties many times, and have taken the offer many times. I haven't ever received a royalties check yet during my career. Trust me, I'm a risk taker, probably more so than most on this board. I don't have a house payment or a wife or children, so I can afford to make risks, and yet, I still haven't received a royalties check. I'd say the odds are that a royalties offer you get will fall through, for a number of reasons, and reasons that aren't even intentional.

Guaranteed payment versus "you might get paid if we don't screw this up once its out of your hands".

Sure, risk vs reward. But for me, I really like to be able to make my insurance payments and pay for groceries, rather than hopefully be able to buy them later down the road.
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