Royalties - Pros/Cons/Legal/Business

Questions:

  1. What are the pros and cons of your past royalties experiences?
  2. What standard practices do you suggest for qualifying potential clients for royalties?
  3. What terms of agreement do you require/use for royalties agreements? (excerpts appreciated)
  4. In what ways do you talk (or not talk) to clients about royalties?

My comments on the Issue…
I used to love the concept of royalties, getting a cut of every sale seemed to be a great idea for being compensated for the true value of my design work! Great idea, but also a nightmare! My insistence on royalties killed far too many deals, or seemed to offer extra invitations for playing every under-the-table card “Percentage of the Profits,” “We’ll pay you stocks instead,” “If we like it we’ll pay you,” “We’ll make you famous,” “we’ll pay you when we get investors/paid” and “We’ll give you an amazing $2k up front.”

Over the last 1.5 years I studied a lot of business and my perceptions of royalties has changed greatly. Royalties increases maintenance of the business relationship. It also makes you an investor, which requires more time examining their business plan, funding, and references to determine whether they’re worth “investing” in. I’ve read numerous discussions between industrial designers showing how impossible (and rare) collecting royalties can be, and related nightmares… enough to suggest an experienced designer would strongly avoid royalties. A limited investment/budget could indicate future difficulty getting paid, limited ability to realize project, and lack of seriousness towards project. Royalties also cause increasing complexity in the agreement (what if they don’t produce, produce less than X units, etc).

Recognizing the cons, there are a few specific instances I would consider royalties (ex: vehicle body-kits on a non-exclusive license). Vital practices seem to include collecting business/resume references, credit references, examining business plan (if inexperienced company), and collecting __% of intended price as a deposit towards royalties.