License Agreement

Advantages to the licensee:

• Using an established intellectual property is a proven way to accelerate market penetration.

• Potential savings in research and development.

• Ability to generate revenue through the use of other party’s property.

Advantages to the licensor:

• Generating passive revenues through royalties in addition to the one-time payments.

• Making use of the skills and expertise of the licensee.

• Potentially lower cost and capital requirements as compared to setting up a distribution network.

• The ability to take advantage of the licensee’s distribution network to penetrate new markets.

Disadvantages to the licensee:

• Responsible for marketing, selling, and production.

• The cost of long-term royalties and one-time fee.

• Dependent on the licensor’s intellectual property and its value.

Disadvantages to the licensor:

• Risk of intellectual property theft.

• Partial loss of control over the intellectual property.

• Revenue is dependent on the abilities, skills, and resources of the licensee.

• Trademark Licensing: Trademarks can be brand names, slogans, and logos. A trademark License Agreement allows a licensee to use them.
• Patent Licensing: Patents are used to protect innovations and ideas in science and other fields. A patent License Agreement allows a licensee to make use of things protected in the patent, including the manufacture of products. This comes in handy because not all patent owners are industry giants that have the ability to produce and distribute their own products.
• Trade Secret Licensing: Trade secrets are not protected by federal or state governments but only through secrecy. The best-known trade secrets are formulas for KFC and Coca-Cola products, for example. Trade secret licensing agreements often come with a non-disclosure agreement that passes legal muster.
• Copyright Licensing: Copyright licensing is common in the entertainment industry and includes visual art, songs, and movies. Copyright licensing is mostly non-exclusive. For example, an artist signs a copyright licensing contract to have his or her music featured in a commercial, movie, or TV show.

Exclusive licenses are typically more expensive for the licensee. It is in exchange for the licensor’s guarantee to not license the property to other licensees.
Non-exclusive licenses can potentially generate more revenue for the licensor by casting a wider net. The disadvantage for a licensor in this regard is that with multiple licensing contracts, there is a higher risk of intellectual property theft.
In addition, there is also what is known as a sole license agreement, where the licensor provides an exclusive license but also reserves the right to use the relevant IP.

A perpetual license is a lifetime license to use a specific IP. These licenses are usually expensive as they do not include royalties. The software industry, for instance, uses perpetual licenses.

There are two types of term licenses:

• A one-time fee for a defined term
• Pay per use

Term licenses are more common, and they have the potential to generate continuous revenue for the owner of the IP. If the licensor offers both perpetual and term licenses, you will have to do your analysis and projections and choose the better solution for your business.