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October 20, 2022
John Rizvi, Esq.

Licensing Your Product Idea: How to Negotiate Your Royalty Percentage with Sef Chang

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If someone's looking just for a rule of thumb for a licensing royalty percentage, is there? Is there such a thing that’s like an industry standard, or does it really vary so much that you can't be can't put a percentage on it?

Yeah, it's hard to tell. But if I did give it, like, a generic range, it could be from 2%, maybe even lower. It can even be from 1% to even five. That's like, those are good. Like, there are some people that have, they've gotten 14, 15, 20. It's like, it's kind of a high percentage, but then you kind of have to do the math. And even the companies themselves don't really know, all right? So when I approach companies, I'm not demanding them for a royalty percentage, I don't ask them. No, I don't tell them, “Hey I am looking for this much percentage.” I actually want them to know, like, first, “Are you interested?” If they're interested, they're going to do their homework; they're going to contact manufacturers; get quotes; and they're going to crunch the numbers, see how much profit that they're going to make, and then from that profit, they'll be able to calculate what percentage would make sense. That's a win-win. So all of that, I let them figure it out, then I decide. I'm like, “Okay, now, since you've crunched the numbers, for me, let's go and look at how much this thing cost, okay? Give me a rundown.” And then we'll, we'll move the needle back and forth until we feel like something's comfortable. And if it's a low percentage, then we're gonna go negotiate for something else, that will make it more valuable, to compensate for the lack of percentage that I'm getting. So it's a game that you're playing. But for the average industry, like it's kind of, it's really hard to say. They are all over the place.

What I found, in my experience, there's some factors— is how close to a final product and packaging you provide, because if all you're providing is the general concept, the idea, then that's one thing, the company still has to invest a lot to get it shelf-ready. Whereas if you've done all that homework, then that increases the percentage. In your experience, are companies looking for exclusive licenses for the most part, like they don't want you—if you sell exclusive rights to them, they don't want you going to their competitors, and also licensing their competitors?

Yeah, so this, this answer is going to be—it's also going to, you know, relate to what the point that you just made about having all that stuff, doing your due diligence to make it a more valuable thing. You know, it's all really in the negotiation. If you are a business and you have every power of what you want to do with your business and your product, and if you do not want an exclusive deal, but they're asking for an exclusive and you recognize that this company does a good job on this side of the market, and I know this other company does a really good job on this side of the market, and I know for sure that I want it to be a non-exclusive, and they're asking for exclusive, I’m like, “Alright, then I'm walking away.” You should be completely okay to do that. And if they're telling you, “Hey, well, because you don't have this and you didn't have this patent or you didn't have this, you know, you didn't tell me this many sales, so we're gonna give you—normally we give you people this percentage, but we're gonna give you this because you didn't do this.” I’m like, “Okay, that's fine. I'm walking away.” Or we're negotiating. So it's not—it's like yeah, those are good ammunition to have but your true—the true power is the decision of the way—what you want to do with your idea.

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