Royalties on manufacturing

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.

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!!!

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.

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.

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.

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.

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!

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.

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.

Tricky how to look at this. Companies make money. Companies just as easily lose money, and the majority of products introduced into the market fail to make money. The investors and owners of the company get to keep the profits, and they have to put in the money when things go the other way.

Just because you worked on a project does not mean you deserve part of the outcome. Conversely, if your work was not appreciated by the consumer, you do not have to refund your design fee. If you charge 3K and the company loses 400K, then also the rate does not reflect the outcome.

If your talents are unique enough, and your sales skills persuasive enough, and your comfort level in the partner high enough, you can choose negotiate to share the risk and the reward. You can also choose to be paid for your contribution in whole up front and let the company keep the risks and rewards. You have to accept the outcome that you negotiated from the beginning. Be comfortable with someone else making money from the success of your designs, it is building your value as well.

Charge too much and they go to someone else, pure and simple. Ask for a royalty when an equally competitive designer is not asking for it, and the will choose him. Most companies will not pay a royalty, too complicated, they want the costs in up front, and design and industrialization are one of the costs.

I can certainly see Taylor’s point, and I think it comes down to what kind of work you do, and for whom. If you have a “retail” design consultancy, with people coming in off the street (inventors, startups, etc.), then you’d have to be pretty crazy to roll the dice and take a royalty on all of them. I have a much different situation in that I only do stuff for a couple companies. It’s very rare for me to hourly bill anything.

If you work on royalties o_nly_ you should have a stronger hand in the whole
process in order to make sure it doesn’t go wrong at some point in sales or marketing.

If you do classical design consulting delivering a model or CAD at their doorstep and
that is the whole gig, the work should be paid on a hourly basis. If you are willing to risk
part of that compensation for royalties it is up to your liking and negotiation with the
client.

Delivering designs for speculative projects on a royalties only basis shouldn’t be.

mo-i

I’d like to clarify that I’m an optimist, and I want us all here to make bunches of money (morally and legally), while protecting and increasing the value of our profession.

It is my strong personal opinion, developed through my professional experience and the experience of many other professional Industrial Designers, that royalties situations generally a terrible waste of your time and your effort which you should be getting paid for.

There are examples when royalties deals might be a great thing, but that is a very small percentage, when opportunity meets talent and a great team of lawyers.

You should start getting royalties when you become a VP of Design at a company you believe in and work hard towards the success of. And then they’re not royalties, they’re shares.

Taylor again I really appreciate the frankness, it would seem that hourly is always the safest bet.

I agree with a lot of Taylors concerns and honesty.

If you are a position of power and trust, then roytalties can make a lot of sense. But all of his concerns are equally valid, and the amount of legal work needed to set it up and potentially enforce it may wind up back firing. As he mentioned, you have no legal right to access the books of most companies (some public companies may disclose individual product sales but it is typically rare) to see how many units they sold.

At that point it becomes a their word vs your word situation which puts you in a bad spot. “I think you sold a million of these” “No we sold 15” “OK well looks like I’ll see you in court!”

If it was a situation where you were working with a client where you had a long established and very trusted relationship with, I would feel differently about it. So you would really have to evaluate it yourself.

I just got burned by a client for a small sum of money, but even with all of the agreements setup the amount of time and pain in the ass it would take for me to pull him into small claims court, deal with all the headache and then actually deal with getting payment isn’t worth the amount of money that was lost. So now I’m starting to become the “trust no one” guy.

Lots of hyperbole, but might be worth a read. Read comments as well…

I think the article still supports most of the points being made.

1 - Not all of Fuseproject income comes from their royalties/ventures, which gives them some level of potentially more predictable cash flow.
2 - Starting OFF with a royalty based model without the “Street cred” and cash flow is still a very big problem. Most of us young guys don’t have the opportunity to wait 2 years for a product to reach production and start selling before we can realize any kind of profit.
3 - There needs to be a close level of trust at the highest level of the partnership, which makes startups ideal for that type of business model, but not necessarily some of the smaller fly-by-night inventor types or large corporations.
4 - You as a designer need to have a vested interest in the success. I’ve gotten some requests for some very weird products where even with my best suggestions wouldn’t have necessarily made for a successful product, but the person was very committed to their idea and still wanted to see it realized. Sadly while these projects aren’t the ones I’d want to take, you always need something to kick in cash.

I think the difference you’d see between the traditional hourly model vs the royalty model is kind of a linear growth (there are a fixed # of hours in a year, so to increase profits you need to either increase your rate, or your headcount), whereas royalty growth would start off slow but ramp up exponentially if you were able to pull off what Behar did.

Don’t forget, design is only a small part of a success or failure. I typically do it all from strategy to branding, design, marketing, development, etc. and even
Then in most cases I wouldn’t do royalty as I can’t control the things I can’t control.

If its that great of an idea and such minimal risk you should have the idea yourself and get investors and make 100%.


Bird in the hand.

R

Though a whole different story on retainers. That’s where we should be looking…

Thought this was funny, from a recent interview with Jerry Manock, who was responsible for early Apple’s ID:

Walking back from lunch one day, I said, Steve, you paid me $1800 for the Apple II, and it’s getting to be more and more popular, and I really think I ought to have a royalty on that. I ought to get, like, a dollar a unit, because $1800 wasn’t all that much. He never hesitated. He looked at me and said, “You’re very good. But if you knew how many we thought we were going to sell in the next two or three years … You’re not that good.” What do you say to that? He was absolutely right. How many millions of those things did they sell? You can’t ask for royalties after you’ve delivered the work, so it was totally stupid and naïve on my part. And he was a really incredible negotiator.

That is a great discussion at Fast Company. Nice to see so many of the comments reflecting the royalty model, and making clear the risks as well.

Here’s how I think of it, using Sony as a generic example.

If Sony used the creative talents of an independent singer, used its team or producers, manufacturing plants, distribution network and sold millions of copies of the produced work to the public, the singer would receive royalty checks for the rest of his life. An then his estate after that.

If Sony used the creative talents of an independent designer, used its team or producers, manufacturing plants, distribution network and sold millions of copies of the produced work to the public. The designer would receive a check for the hours worked or project and nothing more.

Record companies used to pay the artists 35$ per song, and they were happy. No royalties. Until the artists realized they were living in the industrial mass production age.

The filter of potential success (as estimated by me) or weird/useless is a good one. I don’t want to work on projects that are just going to wind up in a void somewhere. A potentially successful project is advancement for my work, whether I get royalties or not.

It is different when people come to you and ask you to work for free on their great idea, Taylor is right, that is a clear warning sign. The change comes when you are recognizing great opportunities and looking to invest in the success and share the rewards through design. Jerry Manock should have realized that before the success of the machine, but in the same article Scott linked to above, he felt this way about things.

Manock, dubious about Jobs’ appearance, asked for the money up front. Jobs refused, but Manock took the job anyway. Within weeks, he had produced a simple foam-modeled plastic case that was uncluttered and exuded friendliness. Jobs was thrilled.

From the same article:

So I said, “Look, this is crazy. I’ll join you, but I only want to work half time. Twenty hours a week. Well, I wound up working, like, 50 hours a week, for half pay. I did that for about six months. I thought, This is totally stupid. When I signed the papers as a full-time employee, I was No. 246. I always tell people I could have been No. 6, which was worth, like, $85 million when they went public. But instead, I wanted my $20-an-hour consulting fee.

“…could have been…”. No more painful words can I imagine.

Reading a little deeper in the same article. His original contract mentions percentage of each unit as a possible. I guess he got out negotiated by Stevie.

I completely agree at a moral level, though since freelance is really more of a weekend gig for me, when someone comes to me and says “Hey could you build a 3D model of this widget I made in my kitchen out of styrofoam?” even if I come in with solutions for improvement, sometimes they just want the service performed and that’s when the hourly rate kicks in.