This is not specifically related to royalties, but it may provide SOME tips on CYA (covering your arse) if you ever agree to a royalties-based or contingent contract.
I recently was approached by a former professional athlete, now entrepreneur, with a business plan for starting a shoe company/brand. In his plan, I would provide the shoe design NOT for an hourly or flat rate, but rather for 5% ownership in the new company. He also claimed to have an agreement with a current professional athlete, which he named, to wear the shoe for an upcoming regular season, and an agreement with a factory which also produces top name brand footwear.
Of course I had several questions which I asked and received a satisfactory reply. But before continuing, I passed the proposal to two different attorney friends. Based on their advice here is my response to the entrepreneur…
Thanks for the info.Â Â While informative, there is still a lack of equity in our relationship.Â You have from me a portfolio of my work.Â You know myÂ skill level.Â What I have from you are: 1) proof ofÂ a Â Family trust registered as a trading entity under the nameÂ , andÂ 2) several emails clearly expressing your passion and plan for an athletic shoe company containing an offer to meÂ of 5% ownership of the company in exchange for my design input.
As convincing as your emails have been to me on a personal level, they alone would not satisfy the questions of a potential financial investor in your company.Â Considering myself as such, here are some particular documents I’d will need to see as well as a specific amendment to my proposed 5% ownership.
â€¢ trust documents which identify the trustee(s) (all individuals who have authority to work/speak/negotiate for the trust).
â€¢ the <athlete’s name> endorsement, includingÂ his agent’s name, business address, and email address.Â I would like to contact him to ensure consent to use his likeness, name etc.
â€¢ proof of the other owners, investors, etc. in your company; specifically operating agreements, corporate reports/papers, tax identification numbers, etc.
â€¢ my 5% share to be offered in the form of stock OPTIONS rather than outright ownership, in order to protect me from any debt lability should the venture fail.
These things will allow me to be as sure about your credentials as aÂ business owner/entrepreneurÂ as you already are about mine as a capable designer, and allow me to continue to work with confidence on this project.
Granted, it must be understood that such an agreement leaves you at risk to never get paid, but that risk is no different than that of many other business ventures. As one of my lawyer friends suggested, “If experience a long delay or any reluctance on the part of the owner to provide those things, run like hell in the opposite direction.”