Commission and royalty based freelance contracts

Design Discussions design employment
1

I wanted to get some opinions and advice on a subject that has come up for me recently. A client has approached me with a proposition for a project that I find quite interesting. He is a start-up with an interesting idea for a business that I would like to be involved with, however he is proposing that the payment model be based on straight commission. I have worked with this client before on other projects, and he is an established, experienced, and trustworthy client.

Obviously I am very hesitant as he is just starting up this venture, and it’s very possible that I would ultimately see nothing for the work I put in. I’m wondering if any of you have had any experience with commission based contracts, and if you could offer any advice on the subject? I am leaning towards proposing an agreement that would include a reduced fixed wage and a smaller % of commission as I would still like to be involved.

Any feedback would be greatly appreciated!

Cheers guys.

2

My consulting firm works with inventors pretty frequently, and we NEVER extend credit/commissions to inventor clients. We do this only with established companies, and our agreements are often like the one you mention at the end - a reduced fixed fee for a royalty on the final product. We generally only take these kinds of agreements when we’re trying to fill in slow periods of work.

However, often these relationships are abused. A client will ‘could you just change X’ like you wouldn’t BELIEVE when they are getting it for free. It removes all barriers that prevent them from just using you, and using you up.

If you are going to proceed down this road, you really need to have an air-tight agreement that establishes what you will and won’t do, and that if any, all, or part of your work is used you get a cut in the end. If you don’t set that up at the beginning you are just asking for hurt relationships and ill will when your expectations don’t line up.

I really do think they should pay something up front, even if it is a reduced fee - it establishes mutual respect for both his position and yours. People don’t respect what they get for free, even if they really do start out with the best intentions. At at least you won’t be out 100% of your time and effort when it falls through. Sorry if this is on the cynical side, but I have been through enough of these to be wary of them, even if the idea is a great one.

3

Definitely not on the cynical side and I really appreciate your input. Obviously the risk as a designer is that no matter how great your design is, the ultimate success or failure of the product has so much more to do with the implementation and so many other factors than the actual design. That’s a good point about the “could you just change X” scenario likely becoming a major factor.

4

I my younger, dumber years I did a lot of these types of agreements. NONE of them ever worked out and the one that I did get commissions for I had to sue for.

BE VERY CAREFUL.

I would not do a fixed fee either cause even that is abused. They can keep making you do a ton of extra work and call meetings over and over again for no additional pay. In the end you may make less than the guy who picks your grapes in a field. Your time is valuable cause it’s other opportunities and paying work time lost.

If you discount, discount your hourly rate, not a fixed fee. Give them a good faith estimate but say it will be based on actual time spent in the end. Take a deposit to start, ideally 50% down and then run hourly rate. Collect money at milestones BEFORE handing over key deliverables like CAD files. No $ No CAD database. Be firm on this.

Say if you charged $100 per hour, you can say you will reduce the RATE to $50 - $75 or something like that in exchange for a percentage of NET SALES. Not NET PROFITS. A company can report no profits so don’t fall for that scam. Sales, on the other hand have a paper trail. Set the percantge against the price they actually invoice customers, again for a auditable paper trail. They have to be able to produce invoices and report that to the IRS. So say 5% of a $100 retail item is $5 bucks without the freight and taxes. Set when these payments are to be made, like quarterly, 30 days after the quarter, etc. Set a late penalty like 1.5% interest per month. Ask for a signed sales report be provided with each payment so you have written evidence should your investigations on actual sales reveal otherwise. This way they can’t wash over what they already stated in their statement later. Get EVERYTHING in writing.

Always protect yourself. You must think carefully about the assignment of IP rights. Do not willy nilly assign your inventions to them. If they did not contribute to the invention, do not let them be named as Co-Inventors on the patents cause they can really screw you if you aren’t careful. Recording assignments at the patent office are absolute and co-inventors can do anything they want without your permission unless you have conditions in place. One way is to record the patent assignment as a “Conditional Assignment.” where they retain rights to make and sell the intellectual property only if certain conditions are being met. So for example, if they stop paying royalties or lie about it and get caught, you can pull their license and right to use your patented ideas for proifit. Decide wheter the license is exclusive or if they have limited rights like they can only use, make, sell in certain countires or to a certain industry.

Put a clause where you can audit their books and set penalties, cure periodsetc. to keep them honest.

A real royalty agreement is very involved and is the domain of an attorney. I’d consider hiring one to draft the agreement if you can afford it. Otherwise you’re letting yourself be potentially taken advantage of.

Oh when hiring any patent attorney or attorney and if the client hires the attorney, make sure you are listed as a client and officially give / sign over teh Power of Attorney to the lawyer, otherwise he doesn’t have a fiduciary duty to serve your interests. A client can hire and attorney and use that attorney to screw you if you are not officially also a client of the attorney he found.

You can tell I’ve been thru a lot of crap so I hope you don’t get suckerd and learn the hard way.

Good luck!

5

Wow very thorough feedback, boy am I glad I come on these forums. What a great resource, being able to share knowledge and experiences amongst other designers. Much appreciated guys!

6

Our profession attracts leeches and cons who take advantage of our talents and don’t want to pay for it.
I hate seeing this happen. Weed and smoke these out.

As an industry we need to share strategies to prevent getting taken.
If we all enact prevention methods, they become accepted industry norm and no client would then scoff at it when we ask for terms that protect us orask for suitable pay. It becomes standard like other professions were people accept how lawyers and doctors are compensated.

Allowing to be low balled and acting like beggars to get some gig is not how we should conduct ourselves as professionals.
If we don’t respect ourselves, they’ll walk all over us. Remember, they need us and our creativity and skills to make them rich.

7

I’ve agreed to the royalty plan a couple times… never saw a dime.

8

What our company often does is initially charge the full price for our design services with an agreement to reimmberse a given percentage of this cost (up to 100%) if the product actually takes off and goes into production. As mentioned above, make sure everything is in writing. With this payment model you know you are always somewhat covered if the client does try and screw you, or the product fails all together.

Good luck! :smiley:

9

Hmmm…Maybe say after the first year you will get a minimum guaranteed royalty amount. So regardless you will get something. Then if they don’t successfully market it in 3 years, you can take over and try to sell or license it yourself and split a bit with them? That way if it goes nowhere in their hands, you can get it back after a period of time and take over.

10

This arrangement has worked well for me in some cases. An ultimate reward can be a serious multiple of any possible rate that could be charged up front. Trust, and a good contract, understanding is of course key, mentally framing the work without full pay is also an important element.

Thinking of the work you do as an investor is a frame that is better understood by both parties. Investing money or design time can lead to a loss or a profit. You have to feel good about a project and its future in the market with this partner. The royalty is the payment for the investment.

If you want a guarantee only settle for the fee up front, in many or most cases, this is the prudent approach. If the opportunity exists to invest in a project and reap good rewards, it can be a good thing.

11

Thanks for the advice mpdesigner!

12

As a follow-up question, what do you feel is a ballpark percentage that a designer would charge in such an arrangement? I know there are possibly many variables, but any numbers would be useful for dialogue.

Cheers!

13

Until you are a superstar, 1-5%