Sometimes your licensing partners become wildly successful with your IP. If your partner is a startup, it can skyrocket its value. And in many cases, that value offers a higher royalty revenue ROI than a straight “cash payment” royalty rate.
When a startup commercial real estate tech company in Texas looked for a way to adapt their technology to a mobile platform, they turned to licensing. In this case, it was a Canadian company with an artificial intelligence platform for marketing, customer experience, and real-time data insights.
The real estate company integrated the AI technology into their commercial real estate platform. It enabled them to quickly create a state-of-the-art mobile app to connect commercial property operators with tenants. In addition to providing clients an efficient property management tools, the app also increases tenant engagement through marketing partnerships which in turn help generate a higher ROI on their commercial property.
The licensing deal included almost $2 million in royalties for rights to the technology. But the startup didn’t have to pay that all in cash. Instead, the royalty payments are a combination of $250,000 in cash and the balance of the royalty payments in equity.
When negotiating royalty rates, cash isn’t the only way to pay in a licensing deal. The equity option is used by universities when licensing their technology to startups. Startups are often more willing to take on less developed technology risks. In this case, instead of the startup spending all its money on licensing fees, the University takes equity in the company and receives royalties once they get into the market.
This equity royalty option is good to use if your IP represents a big part of a startup’s business. As the startup uses your IP in the marketplace, its value increases at different stages. For instance, biotech and some more complex life sciences companies rise in value through their various IP development stages, such as moving from clinical trials to the test market stage. In other situations, such as the Canadian licensor, it receives “cash” royalties, and its “equity” royalties increase in value as the real estate startup increases its customers and revenues using the AI app technology in the marketplace.
Here are some essential points to consider when negotiating equity for royalties. The first is how financially solid the startup is, meaning do they have enough capital to get your IP into the market? If not, the second tricky issue is negotiating terms to maintain the royalty equity “equivalent value” if the startup receives additional funding.
Flexibility and creativity in licensing deals are necessary to accommodate the unknown IP and market challenges that inevitably appear. Sometimes the deal terms for royalty rates include upfront payments, annual minimum guarantees, and running royalties. In other cases, such as with a startup, equity instead of cash or as part of royalty payments is a creative strategy for making the deal work and potentially increasing the ROI on your royalty revenues.
Rand Brenner is an IP professional whose passion is helping inventors, startups, and businesses of all sizes use licensing to turn their IP into income-producing products, services, and technologies. His decades of experience run the gamut from medical devices to food technology to consumer products. He’s licensed some of the biggest Hollywood entertainment blockbusters including the Batman Movies (1 and 2), and the number one kid’s action TV show, the Mighty Morphin Power Rangers. Rand speaks about licensing and is a featured speaker at investment conferences, trade shows, colleges, and startup events. His first book, Hidden Wealth: The Money Making Power of Licensing was released in 2019 and is available on Amazon.com. He’s also a published writer with articles appearing in several prestigious trade magazine including The Licensing Journal, Intellectual Property Magazine, and License India. Rand also mentors at the Cal State Fullerton School of Business and Economics and is a judge for their startup business plan competitions.