Bright Ideas

Learning the finer points of negotiating

I've received many letters from readers entering the negotiating gate in the race to sell their great ideas. They're both excited and scared--excited because their dreams are within reach and scared because their plans could go up in flames if negotiated poorly. Well, move over, Monty Hall: You're about to learn the basics of "Let's Make a Deal."

Negotiating is an art. I'll never forget the first deal I negotiated by myself. A buyer wanted the TV rights to my product but wanted to negotiate without using attorneys--the argument being the savings in attorneys' fees. Well, I took the bait, and the contract ended up in litigation. What became clear to me during this expensive legal fight was that our contract was missing some standard language that would have made the intentions of the agreement clear and concise. Lesson learned: Pay now--or pay later.

Your first step in negotiating should be to find
an attorney experienced in business contracts. A good attorney is expensive, but this is one of the most important negotiations you'll be involved in.

Don't assume the attorney can and will do everything for you, however. He or she is only as good as the information you supply. Therefore, you must be personally involved in the negotiations and thoroughly understand what is being agreed to.

Here are some of the basics that should be included in a contract with a potential buyer:

• The granting clause defines in precise language what is being licensed or sold, to whom, for what purpose, for how long, and under what kind of conditions. For example, if you grant a license to a corporation, you should define whether the parent company or its subsidiaries also get to use the license. If there are improvements made to your idea, who will get the rights to them?

If your idea is patented, trademarked or copyrighted, or if you have developed specific know-how that is required to demonstrate how to use the product, you need to address that in the granting clause. Reference any trademarks by name and list patents by number; you need to leave as little to the imagination as possible.

• The royalty clause defines how you will be paid. It should be written precisely and indisputably, include the royalty amount, and have a specific payout schedule.

• Many licensing agreements also include a minimum royalty payment provision. This guarantees you a minimum royalty payment regardless of how many units your licensee sells. This is helpful because it gives your licensee incentive to get out there and market your idea--or pay a price for doing nothing.

• Also important is a reporting clause. When calculating royalty payments or unit sales, buyers use their own records. If you want to verify reported amounts, you'll need access to those records. A reporting clause outlines the record-keeping details you require and allows you access to the buyer's records.

• Include a default provision in the event the buyer doesn't pay you. The typical default provision requires you to serve a notice of default to the buyer and then provide a time period in which to "cure" or fix the default.

• Your agreement should also contain an indemnity provision. Indemnity means security against hurt, loss or damage. Such a provision ensures the buyer will pay if you are sued for something he did in selling your product. Conversely, if you are the owner of the patent or trademark listed in the agreement, you'll likely need to indemnify the buyer should someone sue them for patent infringement.

Make sure the rights revert to you if and when the contract terminates and that the buyer no longer has the right to make, use or sell your product after this point.

This article was originally published in the July 1997 print edition of Entrepreneur with the headline: Bright Ideas.