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thermionic

Well-known member
Joined
Jun 3, 2004
Messages
1,671
Hi,

Let’s say you’ve spent several years developing various blocks of circuitry. They were originally developed for your ‘own’ products, but lack of promotional finances and rent-paying duties has stalled the projects from getting off the ground. That’s not to say they won’t get off the ground *one day*. The circuits were designed by a variety of designers who you paid and you own the copyright (at great pain + expense).

So, you tell some established ‘boutique’ brands about these projects and loan them prototypes. They want you to build them, with their branding stamped on them… you think that business is no place for egos, and you’re not about to turn away cashflow (I live in the real world, unfortunately).

My question is: how do you structure the deal so it’s fair? I’ve already ‘licensed’ one product and guess what they did? They told me to engineer it so that I sold it to them for 60% below retail, which I did. They then increased the RRP so that they’re making 3-4 times what I’m making…all for picking up the telephone and telling some idiot that ‘it sounds good, buy it’, whereas I have to build and test the things…

Structure-wise, I don’t want to force them into giant MOQs because that’ll result in stalemate. Nor do I want having to stomach MOQs from my suppliers without them sharing the strain. 

I really don’t want to get screwed. One benefit is that, long term, I get the kudos if the products are successful (providing they don’t try to gag me…). Currently, the only provision is that they keep the product if they sell a certain amount a year. However, this worries me legally, as they could argue they’d broken it to the market, regardless of their sales. They will also argue that they 'developed' the product using their ears, i.e. several prototypes were auditioned before final design was agreed. I guess the only way is to retain copyright to all topologies and ensure their versions are cosmetically unique. If they try and ask me to sign over circuitry IP, then I quote them a typical figure a design agency would charge.

Am I destined to get screwed? I have a good marketing brain and distributors invariably call me for advice… I’ll probably be putting together most of the marketing campaign. Am I letting insecurity get in the way of releasing my own gear? VHS won out over Betamax, but which was superior? They're risking the cash, is my problem that I don't have the confidence to risk my own? Should I resign myself to getting screwed, on the basis that success will instil confidence to do something off my own arse?

Anyway, if you’ve got this far into my rambling post, thanks!

Justin
 
Justin,

One of my oem customers wanted to licence my product after purchasing about 200 units over few years. We agreed on the royalty and our joint lawyer drew up the contract. Before everything was signed my customer said they discontinued my product. I know they did not. Soon they will come up with their own design which will probably a version of mine.

Sooner or later you are going to get screwed one way or another. That is how it goes.

It all comes down to how desperate you are. But no matter what do not give any rights to anybody. That is the product and it is your design. You give them to market it for a period of time after which it becomes subject to re-negotiation. If they can't negotiate then you take your product and go somewhere else. They do not own any intellectual rights over it. As you already licenced a product I will not dare to teach you how to suck an egg but  get your lawyer to draw up the contract and make sure it is in plain English. Short sentences each of which is black and white.

 
I have been studying that exact question for several decades.

The easy answer is there is no easy answer.

There are often differences of opinion about the relative contribution of design, manufacture, merchandising, etc. The grass always looks greener (more profitable) in the other guys business contribution. Manufacturing operates on a slim profit margin with relatively high capital expenses, retail looks like a juicy profit margin but inventory carrying costs, losses and write downs can wipe out a lot of margin. That said in todays internet age is not heavy lifting to sell direct. If the customers are going to an established dealer to buy something from that dealer and he then sells them the product, he deserves credit for creating that part of the demand.  

Back in the '70s I had a few successful royalty deals where I received a 5% royalty on a few different designs. These weren't patented but the technology was obscure enough that my designs were worth something to my customer (manufacturers) and that's what matters. None of these deals lasted more than a few years and while nice while they lasted not enough to make a cushy living from.

I took a (15 year) break away from running my own small business to be a cog in a bigger wheel at a decent sized manufacturer. This was a learning experience about many things.  Coincidentally while there I only saw one outside deal that was a success and that involved a major technology with a significant market advantage. I saw several outside deal turds and even wasted too much personal time and engineering effort on one I inherited where the outside guy never got the design (software) right. In fact one of my jobs there later was to evaluate outside technology/product submissions and I never saw one, I liked. It was sometimes humorous to see what people thought would be a good product for us to make. Several had patents (yawn) but that doesn't automatically make a design or technology worthwhile.

I will repeat my old rant here, that just building a better mouse trap won't be enough to cut it. There are already plenty of mouse traps out there that work fine. So yours needs to either demonstrably better or as good as and a ton cheaper. The the customer has to believe you and be willing to change from his old brand. The old saying is, you must have the product the customer wants to buy, at the price the customer is willing to pay, when and where the customer is ready to buy.

One nice thing about running your own business is it's only over when you say it is, but you can't make the customers buy your product, just because you want them too. Just do it, but be realistic about what your contribution is worth. The sure way to fail is to decide you can't succeed.

JR

+1 to using a lawyer, before rather than after... and when you have a contract stick to the terms of the contract. I knew one guy who licensed his invention to a major company but accepted royalty payments after the contract expiration date, without renewing the contract for another fixed term. The fact that he continued to accept payments meant the deal was now "off the page" and they could claim rights to the new defacto deal. I was trying to license this guys technology for our company but our lawyer wouldn't touch it because of risk of a probable lawsuit from his former licensee.
 
As ever, I'm highly appreciative of the thought-provoking posts, Sahib and John - many thanks.

It's pretty apparent here that there are so many variables / models when a given idea is 'licensed' to another OEM that only one thing is for certain: your only option is to always be one step ahead of the other firm legally.

I've never been in this situation in the 'hardware world'. However, I have a lot of experience licensing music... The typical tactic is to try it on you late in the day, usually the day before anything is signed. I've walked away from deals with major labels because of this. A stalemate emerged. I wasn't going to let them, literally, shaft me and felt it morally reprehensible. Their egos were so large they couldn't compromise as it would lose face.

Thanks again.

Justin
 
Many years ago I got some advice from a lawyer that has stuck with me. It doesn't really matter what kind of a deal you get on paper. If that deal does not make economic sense for both parties, the one getting short changed will break the contract or find some way out of it.

For a license deal to work out, there needs to be a real and fair exchange of value. Fair in the minds of both parties to the agreement. A good license deal is a partnership, not a competition or saying one step ahead a business associate. Note: few people value their contribution the same as others so good partnerships are rare.

JR

PS: There are classic models for sliding scale royalties with fixed or guaranteed minimums and reduced rates for higher sales volume. If a product is wildly successful the royalty percentage drops making it less desirable to work around, while the licensor is still making more money. 
 
A good license deal is a partnership, not a competition or saying one step ahead a business associate. Note: few people value their contribution the same as others so good partnerships are rare.

I only really have experience in the music biz to compare, but that experience tallies with your sentiment exactly. There are models of successful artists who go on the attitude that, if each party doesn't trust the other, or value their contribution just as highly, no amount of contracts will ever create this trust - therefore they work without contracts! Steve Albini promotes this model, as do certain bands. I believe a basic contract is needed, but the Albini moral stands true in many ways.

The next step is to make a kludged prototype for this client. He's telling me part of the feature set, so he deserves credit there, but the circuitry is mine (well, mostly what I've paid hourly rates to qualified designers to get...). The feature set / layout will be a shared effort, with me doing the CAD.

I'm thinking the best way is to make it clear that I own circuitry copyright and charge him an hourly rate for the prototype + parts cost. The prototype is supplied as a custom order. If production goes ahead, we negotiate this before the production version is designed.

Thanks again.
Justin
 
The most important value of contracts is not to hold people to their agreements after the fact, but to make sure both sides really know what they are agreeing too.  More often then not, problems arise when both sides thought they had a different deal. (I have also found contracts useful to remind guys who forgot what they committed to).

It is probably worthwhile to discuss both his and your expectations about the future. Lawyers are expert at how deals can go sour so have most value before the deal, not after. IMO

JR

 
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