In this final installment in my three-part series on lessons from the trenches of royalty negotiations, I talk about economic realities.
Example #3: Blinded by Greed
The licensing manager from a Fortune 100 company called Fuentek to tout a deal that he had just signed. Several internal innovators had formed a start-up and licensed their technology—and the licensing manager was thrilled to have negotiated an up-front payment of $1 million, payable in three installments over the first year.
This scenario was quite similar to one faced by our earlier Davids, as they attempted to negotiate with a Goliath. But this time around, Goliath had won the first round of negotiations.
Although we hated to burst the licensing manager’s bubble, we predicted that the innovators would be back to renegotiate the license before the second installment was due. “Cash is king in a start-up,” we said. Such an up-front payment created a heavy burden that would drain the start-up’s coffers. The liability also would prevent the start-up from getting additional funding from other investors.
The licensing manager brushed our comments aside and insisted the deal was a good one.
As we expected, the innovators returned several months later with a request to renegotiate the deal. Fortunately for everyone involved, this time around the Goliath involved was more reasonable, and we helped the group develop a win-win deal.
Look at all of the implications of a deal—both for the licensor and licensee. To be successful, a deal has to make good business sense for both parties. A good deal is one that works for everyone.