Royalty term: Overview, definition, and example
What is a royalty term?
A royalty term refers to the specific conditions or duration of the payment arrangement in a licensing agreement, where one party (the licensee) compensates another party (the licensor) for the use of intellectual property, such as patents, trademarks, copyrights, or other proprietary assets. The royalty is typically a percentage of sales or a fixed fee paid periodically, and the royalty term defines how long these payments will be made and any specific terms attached to them, such as payment frequency, minimum guarantees, or escalation clauses.
For example, a music artist might grant a record label the right to sell their music in exchange for a royalty term that guarantees them a percentage of sales for the next five years.
Why is a royalty term important?
A royalty term is important because it provides clarity and structure to licensing agreements, ensuring that both the licensor and licensee understand their financial obligations and rights. By specifying the duration and terms of royalty payments, the royalty term helps manage expectations, protect the interests of both parties, and avoid disputes regarding payment amounts and schedules.
For SMBs, negotiating a clear royalty term is essential when licensing intellectual property, as it determines how long they will receive income from their creations or assets. It also helps the licensee know what to expect in terms of payment structure.
Understanding royalty term through an example
Imagine your small business owns a popular software application. You decide to license the software to a third party who will sell it to customers. In the licensing agreement, you include a royalty term stating that the licensee will pay you 10% of all sales revenue from the software for a period of 3 years. This means that for the next 3 years, you will receive a share of the revenue generated by the software sales.
In another example, a business that holds the rights to a bestselling book may license the rights to a film studio. The royalty term might specify that the studio will pay the author a fixed percentage of the box office revenue for the next 10 years, starting from the film’s release date.
An example of royalty term in action
Here’s how a royalty term might be referenced in a licensing agreement:
“The licensee agrees to pay the licensor a royalty of 5% of the net sales revenue generated from the product. This royalty term will be in effect for a period of 7 years, starting from the date of the first sale of the product.”
Conclusion
A royalty term specifies the duration and conditions under which royalty payments will be made in a licensing agreement. For SMBs, clearly defining the royalty term is essential to ensure that intellectual property rights are managed effectively, and both parties understand the terms of compensation. By setting a clear royalty term, businesses can generate ongoing revenue from licensing deals while ensuring that expectations are properly aligned.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.