Business Musings: Money 3 Deal Memos (Contract/Negotiation…and…Rethinking The Writing Business Part 12)
In the past two Business Musings, we’ve discussed licensing in and licensing out, all in terms of money. The question I’m resolutely refusing to answer is How much money can I make? In fact, I’ve been telling you that a focus on money is the focus that will cost you more than you make.
The reason for that is all contractual. When you license your work out, meaning that someone else will produce whatever product you’ve decided to license, what you will earn will depend on the contract you sign.
Generally speaking, the more money you ask for up front, the more you will sacrifice down the road in rights or in control. However, there are instances where this is not true.
The first instance is the one you folks think of when you say to me But I’m not famous enough to get a licensing deal. Nope, wrong. You don’t have enough clout to get a good licensing deal with a great payment up front.
You are able, even with only one (small) novel published, to get a licensing deal, maybe even one you want. But you won’t get millions for it or, if you do, you will sacrifice almost everything else (but money) in the contract.
The second instance is that you’ve done a lot of business with this licensee before, you have a good relationship, and they want to pay you more up front. There are reasons for that on their end: They’re respecting you and showing how much they value you, and they’re trying to keep you in their eco-system. In this instance, they will not tamper with the other aspects of the contract. You’re earning for them. You’re a valuable commodity, and they want to reflect that value (and prevent you from leaving).
In (almost) every other circumstance, a boatload of money up front means a boatload of troubles if you expect to get a good contract. Just look at the music licensing deals for a new band/act in the music industry. Those deals are horrendous, but they look lovely up front. Sometimes the band gets high six or low seven figures as an advance. But everything gets charged against that advance, and it’s not a surprise that a number of beginning bands (in particular) actually owe money to the label at the end of their first tour, rather than make money on it.
Yes, licensing can bite you. And it can bite you when you only look at the money, and not at the rest of the deal.
You will need to learn contracts and how to negotiate. No, an agent won’t save you. As I mentioned earlier, a book agent has no clue what to do here. Licensing agents might help, but the folks I’ve talked to at the Licensing Expo (the folks who run it) prefer licensors to negotiate their own deal, and then have a lawyer handle the fine points.
Doesn’t that sound familiar? I’ve been advising that for years.
What you’ll end up with is a deal memo, that the lawyer(s) will then work off of.
A deal memo makes a list of the important aspects of the deal. The contractual language will then ensure that there are no gotchas in the rest of the deal.
There’s a lot to a licensing deal and a deal memo. I’d love to share one with you, but the ones I got at Licensing University are proprietary. The ones I have that I’ve negotiated are also proprietary. (Besides, I don’t want to share the details in public.)
So I’ll give you most of the areas in a deal memo, and I’ll focus on the parts of the deal memo that can have a huge impact on the amount of money you earn and future licenses that you can negotiate.
Also, I am not a lawyer, and nothing in this blog post should be taken as legal advice.
The deal memo begins with establishing who is making the agreement. You are the licensor, and you have to guarantee that you own the intellectual property that you’re licensing. (You think this is a well, duh, but it’s not. You might have licensed that particular part of the IP to someone else in, say, your traditional publishing contract. If so, then you no longer control that particular license— and then you’re fucked, as they say.)
The licensee has a lighter lift here. They need to establish their company, and if you are smart, that they have the wherewithal to make/distribute/do whatever is outlined in this deal memo.
The Licensed Property: be really specific here. Not, say, The Fey series, but Book One of The Fey Series: The Sacrifice or perhaps the character of Nicholas or maybe the world itself. Be specific here, and be as narrow as possible. But not too narrow—the licensee has to be able to produce whatever you’re licensing.
The Licensed Product: Again, be specific. If you’re licensing toys for your character, make sure that you’re clear. Are you licensing a bobblehead only? An entire line of toys? Some Hot wheels for your cool car? A plush toy for your character? Because all of those can be separate licenses but if you only say that you’re licensing toys, then you’ve lost all of those other licenses. And you’re leaving a lot of money on the table.
Exclusivity: You know this one from when you’re licensing art as the licensee. If you want a piece of art for your cover only, you’re asking for an exclusive. This works in reverse. As a licensor, you might give an exclusive to some licensee.
But exclusivity isn’t always necessary, particularly when you’re dealing with different licenses. You might license the bobblehead for your character, and that might be exclusive. Or you might license the bobblehead and make certain that you’re not licensing a bobblehead to anyone else.
The licensee must pay more for an exclusive license. Always.
Territory: The territory is where the licensed product will be available. Again, make this as narrow as possible. The territory can be the State of Nevada. It can be North America. It can be Worldwide.
You might narrow it even more. In publishing, you might license Worldwide English Language Rights, reserving Worldwide French to yourself. (And all the other languages as well.)
The narrower the territory, the more licenses you reserve for yourself. But again, be cognizant of what your licensing partner needs. If they are putting up ebooks (for example), limiting the access to less than worldwide is possible, but hard. And it might not be necessary for your deal.
So work smart.
Channels of Distribution: Yeah, that’s an older way of looking at licensing, but the term still fits. For example, if you’re doing (as someone did) a karaoke bar on a cruise line, then you’d specify that the karaoke bar license would be for Royal Caribbean only. (There would probably be a noncompete for other cruise lines in the agreement.) One person I heard at Licensing University only licensed an “experience” (like the karaoke bar) for a single cruise ship, not a cruise line.
That’s a distribution channel. You can be wide, as in all retail stores. Or you can be really narrow. Walmart only. Or Amazon only.
Those of you doing KDP only are limiting your distribution to one channel. That’s a legitimate deal, and it’s pretty common for that single channel to ask for limited exclusivity. (For a few months or a year or two.)
Again, the channels of distribution are limited only by your imagination.
One of the deal memos I have here chops the Channels of Distribution section even farther into Approved Channels of Distribution and Restricted Channels of Distribution.
So think of that bobblehead. You might be able to sell it through high end toy stores only, but not discount toy stores (named) or not online or whatever. Approved are the high-end stores (usually named) and Restricted are the other things I listed.
In the cruise line example it would read Approved: Royal Caribbean; Restricted: Disney Cruise Lines, Carnival, Princess…you get the idea.
Note: as you keep narrowing the licenses, you open the door to getting other licenses. You won’t get as big a payout up front, but you might make more money in the long run, by having dozens of licenses on one property instead of one. And, bonus!, you might end up controlling even more aspects of the license and the future of the property itself, instead of handing both over to someone else.
Next thing to negotiate is Lease Term. That includes the Initial Term and any Renewal Terms. You don’t have include the option to renew, if you don’t want to. I always include the line that the project can be renewed on the same or better terms than the original term. That line immediate precludes any negotiation that begins with “this isn’t doing as well as expected, but we’d still like to renew…”
There should always be an end date for that term. Not something vague like “the book goes out of print.” (As in traditional publishing.) The term can be as short as one year (but that’s rare) to as long as ten (also not common). According to the folks at Licensing University at the Las Vegas Licensing Expo, the average licensing term is 3 years with another 3 years of renewal.
Take that for what it’s worth.
The term gives you a chance to leave an agreement that’s not working for (either of) you. It also allows you to negotiate better terms when the initial agreement expires. Again, that’s another way to make money.
Marketing Date: This used to be called On-Shelf Date, but that’s changed as experiences and other non-tangibles became a major part of marketing. If this target gets missed, it’s a way to cancel an unworkable contract if the date is missed. If the date is on time, it helps everyone (including you) with the planning.
Royalty Rate: This rate is changeable. As one of my definitions says, the amount is typically calculated by multiplying the rate by net/wholesale sales. But that’s changing. Also, generally, the rate can run at 2% for a small licensor to as much as 20% (for, say, Disney). If you have clout or your IP is strong, you can get more. Should you get more? I don’t know. That’s up to you.
Advance/Payment From Licensee Upon Execution: This is the number writers always ask about, because they figure it’s the only money they’ll get. In traditional publishing, that’s often true. It’s not true elsewhere in licensing.
This is not get-rich-quick money. This is part of a business deal.
This is often part of the guarantee (see below). One person at Licensing U stated the best thing about an advance is that it makes certain your licensee partner actually has the money to produce whatever they’re being hired to produce.
The advance must be on signing. Not six months after (as in traditional publishing). In the deal, make sure the payment is within 10 business days of signing.
There is no standard, but generally, the advance is 25% of the first year’s minimum guarantee. See below for the math.
Minimum Royalty Payment Guarantee: If you’re making a deal with a licensee, they should have an idea how much revenue this project/license will generate. They can’t just blow smoke up your butt about this (as they do in traditional publishing). They need to put their money where their mouth is.
Succeed or fail, the licensee guarantees a minimum amount of money to you. The folks at Licensing U, with all of their experience, say that in a three-year deal, it’s better to have a minimum payment every year than it is to get the money up front. Why? That guarantees that the licensee remains focused on your IP. (Instead of paying it all at once, and moving onto the next thing.)
If they stay focused, they continue to sell the product/experience, and you have a greater chance of earning more than the minimum.
What is a standard minimum payment guarantee? As with everything else here, there is no “standard,” although some suggest that the licensee pay a minimum guarantee of 50% of the projected royalty.
Gosh, um, that means the licensee must have a business plan for you, with projected earnings on it.
So assume that the projected royalty is $600,000. The minimum guarantee would be $300,000.
If you have a three-year term, then the minimum guarantee per year would be $100,000 per year.
That means the advance payment would be (on signing) $25,000. See? Not get-rich-quick money. Prove-yourself money.
Here’s what happens for the licensee. If the license do as projected, the money is as projected. If the sales are better, the licensee has to pay more money to the licensor (you). If the sales are worse, the licensee is out that $325,000, and will take a loss.
Here’s what happens for the licensor (you): If the project does as expected, you get the $600,000. If the project does better than expected, then you’d get the $600,000 + (royalty rate x net sales over and above the $600,000).
If the project does worse than expected, you still get $325,000 over three years.
And that, my friends, is how the money works.
Now, add up a lot of licenses, with minimum guarantees and small(ish) advances. You’ll be making continual money, but not necessarily get-rich-quick money.
But, as I said before. Investors believe that you’re better off earning smaller amounts of money on several investments than you do on one risky investment with a big payout.
I have always had licenses going, usually translations (publishing) and options (TV/film). That’s why I laugh when indies say that I’m doing poorly based on my Amazon algorithm. First, Amazon algorithm on which book? I have hundreds of them. Secondly, the book sales are only the tip of the iceberg on what I earn from my IP.
There’s no way that anyone from the outside can figure out how much I earn. Or any major working writer earns. When Forbes guesses which writer earns the most, they’re guessing on publicly known licenses, not on all the other licenses, many of which never get announced.
So how much money can you earning licensing? A lot. A little. A boatload, in bits and pieces.
One year, you might make $12,000. Another year, $1.2 million. A third year, $50,000. It will vary, depending on the deals, how you negotiate them, and how smart you were about handling the details.
Yes, this is a lot of work. Yes, you need to learn how to do this. Because just hiring a lawyer or an agent won’t cut it. You have to learn it.
And you need the courage to negotiate for what you want.
You can do this. Time to start studying. The information is out there. Now you get to figure out how to make it work for you.
The year keeps slipping away. We’re only a month from our Business Master Class in October. Just this afternoon, the class filled up for 2019, but we’ve decided to open 2020 early, since there was so much interest in that class. The attendance is limited there as well, and so is the hotel room block. Those who sign up early will have a guaranteed room in the conference hotel. Here’s more information on 2020.
Dean’s also doing a learn-along as WMG Publishing makes its transition to a more licensing based focus. Licensing Transition: A Year-Long Journey From IP To License is something you can sign onto, and interact with him and others taking the course.
I’m also doing some extra blogs on Patreon, and will continue to do so as the year progresses. Many are focused on licensing.
But I’ll be finishing this series here, so no worries if you don’t want to go to Patreon. The series will be free on this site, and will remain here. I suspect I’ll make a book out of it as well.
So…here’s the standard plug:
If you feel like supporting the blog on an on-going basis, then please head to my Patreon page.
If you liked this post, and want to show your one-time appreciation, the place to do that is PayPal. If you go that route, please include your email address in the notes section, so I can say thank you.
Which I am going to say right now. Thank you!
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“Business Musings: Money 3 or Contracts/Negotiation (Rethinking The Writing Business Part 12),” copyright © 2019 by Kristine Kathryn Rusch. Image at the top of the blog copyright © Can Stock Photo / andrewgenn.
My favorite sentence in the above is the reminder: ‘ I always include the line that the project can be renewed on the same or better terms than the original term.’
And its consequences.
That, and the concept of being a business partner, not a serf.
Can’t wait for your book.
Readers, these are the nuts and bolts of how this works. I advise you to read it, read it, and read it again. Once you have this information burned into your brain, then you’ll be better prepared to go forward with your projects. Forewarned is forearmed, as the saying goes.
Kris: excellent write-up.
Great post … all of ’em!
Literally, as a result of reading your blog and Dean’s, I’m launching myself into the licensing world – to learn in anticipation of selling licenses for my Greenland Constable and “friends”. I’ve got a supervisory meeting with a Trademark lawyer – actually, the Danish ministry for trademarks and patents. Then I’m off to the BLE Licensing Expo in London at the start of next month. Two meetings booked, and seminars I want to attend.
It’s equal parts exciting, daunting and exhilarating.
Thanks for setting me on this course.
Read Dean’s pieces on trademark. That’s probably not a necessary step for you. Glad you’re having fun with it, and have plans!
Please, please turn these blogs into a book. I keep wanting to highlight big chunks of this. So much great information.
From a personal perspective, I like the way the money works, spread out over several years. Means I can assess cash flow a little better from year to year. Which is always a nice bonus.
Thanks for another great post!
Thank you, this is very interesting. Who is usually given the option to renew under a renewal clause? Does this give one party the right to renew whether the other likes it or not, or do both parties have to agree for a renewal to take effect? Your mention of renegotiation makes me think that both parties would have to agree… but then I’m not sure what the point of the clause is, because presumably a renegotiation could happen even if there was no renewal clause. Maybe I’m missing something?
In a contract, both parties have to agree to everything.
a renegotiation could happen even if there was no renewal clause.
A renegotiation only happens when the contract ends. So if there’s a renewal clause, it’s part of the contract. All contracts are different, and so I can’t give you “usually” and “normal.”