I am currently working with a company to sell my chair design to them. They are enthusiastic about it, they have prototyped some of them already, and they are eager to move forward with it. The stumbling block at the moment is the contract.
Overall the majority of the contract is reasonable:
3% Royalties based on their wholesale price to purchasers
2% “Finder’s Commision” if I find a new buyer who purchases the chair from them for sales.
Monthly Royalty payments (delivered up to 60 days after closing of sales though)
They want to place a cap on my Royalty Earnings at $75,000 per year.
They want to only pay me Royalties for 5 Years.
This is my first attempt at selling a design, and coming directly out of college I am greatful for it and willing to compromise on my part to make it happen, but I also don’t want to get screwed over. Lighting doesn’t strike often, and I want to make sure that I get the most out of this opportunity.
That being said, has anybody had here had some experience with negotiating such a contract for selling a design?
If so, do you feel the cap and the time span for paying Royalties is reasonable, or what should I expect as a baseline?
that sounds like a pretty standard agreement to me!
Usually, royalties are anywhere from 2-5%.
I’d push them on the ‘lifetime’ thing, and perhaps on the ‘yearly’ thing as well. I think they may be trying to push that on you since you’re right out of school.
That being said, I have known of some companies to completely reneg royalty agreements when they realize how much they are actually going to pay out to the designer! It seems like they have realized this up front, and have some experience with it…
I would agree to the cap of $75k which is amazingly high anyway in exchange for lifting the 5 year length… you want a lifetime royalty and here’s why-
if it is a really cool chair, no one will buy it the first few years out, if it really has legs it won’t peak until much later
What if the company under promotes it for 5 years and then starts selling like hotcakes after your contract expires (do hotcakes sell that well?)
I would even negotiate a lower cap- say $50k to make it a lifetime royalty. Or propose the minimum that was suggested earlier, or if you are strapped propose an upfront payment and then a smaller royalty. Negotiate, this is your only time to do so. And do it quickly before they tire of dicking around with you.
I would STRONGLY suggest getting a lawyer to look over the contract and draft a rebuttal proposal. Manufacturers are notorious for breaking royalty contracts so you need to protect yourself. I have learnt this the hard way!
Also, it sounds like you should be looking at a Licensing Agreement not a royalties contract. If this is a design that you developed and own and they simply want to manufacture it, there is no reason they should own the rights to the design forever. Really, go to a lawyer, an intellectual property lawyer would be best!
JL, this sounds like a pretty good deal any way you look at it, especially given you’re just starting out. If you built a trusty, solid relationship with the firm, don’t damage it by trying to play hardball with the elephant. Are you even sure to be able to reach $75K income/year in terms of sales?
And don’t act in front of the like it’s your first and last good product idea, it will just weaken your bargaining position. Best protection is not a lawyer necessarily, but the mutual understanding that - in time - they stand to make much more money with you off your future designs. If they’re smart and playing for the long term they’ll see it themselves.
Try to build the relationship positively, but it sounds very good from your first offer already. Idea is not to overbite while still a small fish.
Hi. I’m wondering how you did this. Did you get a design patent or something first? Did they contact you or vice versa? And what’s to stop them from just using your design if you don’t have some kind of legal protection? Thanks for sharing your experience!
In order to protect it I filed a provisional patent before it was shown publicly. A Provisional Patent differs from a regular Utility or Design patent because it is intended to be a short term or “starter patent”. You are only required to provide a detailed description of your invention, and to provide drawings of the invention. Besides that it only costs $80 to file, as opposed to a regular Utility Patent which can cost up to a few thousand if done by a lawyer. A Utility Patent requires much more time and effort. The downside of the Provisional Patent is that you must follow up with a Non-provisional Patent within one year, and if you fail to do so you lose the right to patent your idea ever.
I was also very fortunate to have a fellow ID student at my college tell her relative (who is the VP of the company looking to buy my chair) about me and my idea. He contacted me about a month after graduation and we set up a meeting. I was able to find an interested buyer on my first attempt at marketing it, and I can imagine that otherwise I would have had to try and contact companies and tell them, “I have an idea for a product but I don’t want to tell you what it is without signing an NDA first.” An NDA or Non Disclosure Agreement is a document that basically makes an agreement between you and the other party to not discuss with anyone else intellectual property. Many companies may try to refuse to do that and say “we may already be working on some form of your idea.”
Anyway, they had no problem with signing the NDA and I also have the Provisional Patent to further protect myself. I’m sure that without a connection like I had I may have been trying for months and would have gotten rejected many times by companies saying “we already have designers, we don’t need your help.” Unfortunately I’m going to have to hire a lawyer to review the contract (seeing one tomorrow morning), but other then that things have gone much smoother then I could have even hoped for.