This week I am going to cover Minimum Guarantees and Payment Schedules.
Normally, in the negotiation process, the licensor will ask the prospective licensee to give projections as to how much sales the licensee expects to do during the term, using the licensor’s IP. Taking these sales projections and multiplying by the proposed royalty rate, the licensor can calculate approximately how much royalty revenue the licensee is proposing to make for the licensor during the term, if said licensor were to grant the candidate the rights to use the IP.
Of this projection, the licensor will require a Minimum Guarantee (MG). That is, a minimum amount a licensee will pay, regardless of actual sales achieved.
Upon contract execution, said MG will be paid according to a payment schedule also negotiated and dictated in the agreement. The payment schedule will vary widely, depending on a number of circumstances, but as rules of thumb, if the MB is US$20K lower, licensor will usually try to take it all upon execution in one lump sum payment. If it is more than $20K, and depending on the territory, it may be split into payments usually not more than four installments, no LESS than 25% upon execution, and the final payment not later than 6 months before the end of the term. As a matter of accounting efficiency, we do our best not to have more than 2 installments (with first installment being equal or greater than balance installment), unless the MG is quite large.
I’ll carry on with royalty rates and provide examples next time.