Negotiating royalties is challenging under the best of circumstances. In this three-part series, I outline several real-world examples of successes, near-failures, and collapsed deals. Not surprisingly, in the failed and nearly failed deals, emotions and personal objectives rather than business economics drove the negotiations.
Example 1: David versus Goliath
Several innovators (we’ll call them the Davids) from a corporate giant (Goliath) formed a start-up company and attempted to negotiate a license deal to acquire the rights to the technology that they developed while at Goliath. Goliath had no use and no intentions to use the technology.
The Davids asked Fuentek to assist them in their negotiations. During our initial call with the Davids, they indicated that they planned to offer Goliath a whopping 60% royalty rate. “Why so high?!” we asked. The Davids were paralyzed with fear that Goliath would shut them out. Without the technology, they had no business.
We pointed out that at a 60% royalty rate, they wouldn’t have a business, either. “Run the numbers,” we recommended. After doing some financial analysis, the Davids realized that we were right.
Solution: A Rising Royalty Rate
To be successful, they had to not only get a license, but do so at a more reasonable rate. We were able to help them negotiate a license that started out at 5% and ramped to 10% over time. Working from a position of strength—based on the merits of their business plan rather than a position of fear—the Davids were able to negotiate successfully.
The deal was a huge win for both parties involved. The Davids successfully built their company and sold it a few years later in a multi-million-dollar sale.
Put fear and emotions aside and examine the economics of the deal.