A property owner can allow other parties to use the property under a set of rules specified in the License Agreement. License Agreements are mostly used for intellectual property like copyrights, trademarks, and patents.
A License Agreement is a contract between two parties (the licensor and the licensee). The licensor or owner of the property grants the rights to the licensee under certain conditions.
Depending on your state, a License Agreement may also be known as:
Agreement on Licensing
License to Use
To use any licensed material legally, an individual or organization must first obtain a Licence Agreement. The owner of the content gets to define the limits for using the license and any compensation required.
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To create your document, please provide:
Licensor details: Full name and address of the licensor. Choose if the licensor is an individual or business.
Licensee details: Full name and address of the licensee. Choose if the licensee is an individual or company.
Licensed materials: Define the licensed subject, the type of license, and if the license is exclusive.
Compensation: Select royalty payments, a one-time licensing fee, or a combination of the two. Define how royalty payments are calculated if selected.
Termination: Does the license expire and when? Can it be terminated with a written notice before the expiry date?
Dispute resolution: Arbitration or court as the default method of solving any dispute that may arise. Select the jurisdiction the licensor has standing in. Most intellectual property laws of concern are US federal laws.
Licensor: A party giving the limited right to its property in exchange for compensation or consideration.
The licensee: The party awarded the right to use a property under a set of rules.
One-time licensing fee: Compensation paid after the License Agreement is executed.
Royalty payments: Defined as the licensor’s entitlement to a percentage of the licensee’s revenue earned from the licensed property.
Arbitration: A method of dispute resolution outside of the court system.
The License Agreement has to be signed by the owner of the property (licensor) and the party authorized to use the license (licensor). Notarization is not typically required, though getting the signatures witnessed and notarized can potentially strengthen the agreement.
After reviewing the document and signing it, the two parties should keep a copy of the final document. The licensee must pay to the licensor any one-time licensing fee due as defined in the contract. If there is a breach of the agreement, dispute resolution would first proceed as defined in the contract by default.
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.
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:
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.
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