The 3 primary forms of agreements consist of different rights, advantages and disadvantages 

Intellectual property can be just as valuable as (or more valuable than) physical property. This is because IP can be shared with others in exchange for royalty fees—producing a valuable source of passive income for IP owners.

What is an IP license, and how does it work?

Any form of intellectual property—from trademarks to patents to copyrights—can be licensed to third parties. Through licensing, an IP owner grants third parties the right to use his or her IP while retaining ownership. Usually, the IP owner (the licensor) receives payment in the form of royalties for granting another person (the licensee) the right to use his or her IP.

Another way to think of IP licensing is the “leasing” of intellectual property for a fee. Unlike IP assignments that transfers all ownership of IP, licenses provide only limited use—enabling licensees to benefit from IP while protecting ownership rights of the licensor. IP owners can receive royalties for their licensed IP for their lifetime and 70 years after dying (such that even the families of IP holders can benefit from license agreements).

There are three primary forms of licensing agreements, Each provides slightly different rights, advantages and disadvantages.

  1. Exclusive licenses grant a third party the exclusive right to use the intellectual property. The IP owner cannot use the IP or grant any other third parties the right to use the IP.
  2. Sole licenses grant a third party the right to use intellectual property while prohibiting the owner from allowing other third parties to use the IP. The IP owner may still use the intellectual property for himself or herself, however.
  3. Non-exclusive licenses grant others the right to use intellectual property without restricting the owner from using the IP or granting licenses to other third parties.

You can also combine elements of each of these types of licensing agreements, creating your own custom form of licensing. For instance, some licensing agreements may be non-exclusive countrywide but provide exclusive licenses within a certain geographic area.

What are advantages of licensing IP?

  • Creates passive income for the IP owner
  • Enables a licensor to tap into local markets, a licensee’s productive capacity or unique marketing strategy
  • Creates new business opportunities for licensor and licensee
  • Enables businesses to enter new markets or industries

What are disadvantages of licensing IP?

  • The licensor may lose some control of his or her intellectual property, particularly with exclusive licenses
  • Some licensing agreements can be abused and lead to IP infringement if not monitored closely
  • Depending on the nature of the licensing agreement, some licensors may be fully dependent on the licensee’s ability to generate revenue with the IP
  • A licensee’s actions could damage the reputation of the brand or product

How do I license my intellectual property?

The first step is to ensure your intellectual property is registered and protected in the form of a trademark, copyright or patent. Then you can start marketing to (or identifying) potential licensees.

Once a third party expresses interest in commercializing your product or idea, a licensing agreement must be negotiated to ensure your rights are protected.

What is a typical licensing fee?

“Typical” licensing fees vary based on the IP being licensed. Also, the percentage of sales a licensor retains depends on negotiating skills (and the industry).

For instance, “royalty rates” for consumer products may vary between 2 percent to 10 percent of the product’s sale value. Franchises, on the other hand, may require royalty payments of 1 percent to 50 percent of total volume.

If you’re interested in licensing your IP (or licensing someone else’s IP), it will be important to work with a seasoned professional who can help you negotiate a licensing agreement that works for you.

For more fundamentals of IP, check out the Michelson Institute for Intellectual Property’s free interactive ebook, “The Intangible Advantage,” and free online course “Intellectual Property: Inventors, Entrepreneurs, Creators.”

This information was provided by the Michelson Institute for Intellectual Property, an initiative of the Michelson 20MM Foundation that addresses critical gaps in intellectual property education to empower the next generation of inventors. Michelson 20MM was founded thanks to the generous support of renowned spinal surgeon Dr. Gary K. Michelson and Alya Michelson. To access more resources, please visit MichelsonIP.com.

Nothing in this article shall be construed as legal advice, or as creating an attorney/client relationship.

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The Michelson Institute for Intellectual Property, an initiative of the Michelson 20MM Foundation, addresses critical gaps in intellectual property education to empower the next generation of inventors. Michelson 20MM was founded thanks to the generous support of renowned spinal surgeon Dr. Gary K. Michelson and Alya Michelson. To learn more, visit 20mm.org.