A licensing deal came across my desk last year that would have handed away exclusive rights to a client’s core technology, worldwide, forever, for a flat fee that made sense for maybe three years of use.
The client almost signed it. The other side’s paperwork looked professional. It had all the sections you’d expect. It just didn’t protect the business that built the IP in the first place.
This is the pattern I see constantly with growing companies: you’ve built something valuable enough that other businesses want to license it, and that’s exciting. But the excitement of “someone wants to pay us for our IP” can rush you past the details that determine whether this deal builds your company or quietly drains it.
If you’re at the stage where licensing conversations are starting, here’s the framework we use to structure agreements that protect your ownership while still getting the deal done.
Scope: Define Exactly What You’re Licensing
The single biggest mistake in licensing agreements is vague scope language. “The right to use the Licensed Technology” sounds fine until you’re in a dispute about whether that includes derivative products, related markets, or improvements you make after signing.
Your scope section needs to answer:
- What specific IP is covered? Name the patents, trademarks, copyrights, or trade secrets by number or specific description, not by category
- What can the licensee actually do with it? Manufacture, distribute, sublicense, modify? Each of these needs explicit permission or explicit denial
- What geography does this cover? North America only? Global? This matters enormously for pricing and for your ability to license the same IP elsewhere
- What field of use applies? A medical device license and a consumer product license for the same core technology are very different deals
We had a scenario recently where a company almost licensed their software platform without specifying field of use. The licensee’s business model shifted eighteen months in, and suddenly they were competing directly with our client in an adjacent market, using the licensed technology to do it. A tighter scope clause would have prevented that entirely.
Trade Secrets Should be Carefully Considered
Federal trade secret protection under the Defend Trade Secrets Act of 2016 (DTSA) complements state trade secret law and may provide additional remedies for misappropriation, including federal jurisdiction and nationwide service of process. Licensing agreements involving trade secrets should consider both state and federal frameworks.
Exclusivity: The Decision That Shapes Everything Else
Exclusivity is where licensing negotiations get serious, because it directly affects your future options and your pricing power.
Exclusive licenses mean you can’t license that same IP to anyone else, sometimes including yourself, depending on how the agreement is written. These command premium pricing because you’re giving up optionality. If you grant an exclusive license, you need:
- A clearly defined territory and field of use (so exclusivity doesn’t accidentally block you from adjacent markets)
- Performance requirements the licensee must meet to keep exclusivity (minimum sales, minimum royalty payments, launch timelines)
- The right to convert to non-exclusive if those requirements aren’t met
Non-exclusive licenses let you license the same IP to multiple parties. Lower per-deal revenue, but more flexibility and more total revenue potential if the IP has broad application.
Sole licenses are a middle ground: only one licensee, but you retain the right to use the IP yourself.
For companies in the $1.5M-$3M range, I generally push back on exclusive licenses unless the licensee is paying a premium that reflects what you’re giving up, and unless there are real performance benchmarks tied to it. Exclusivity without accountability just means you’ve handed over your competitive advantage and hoped for the best.
Royalty Structure: Get the Math Right Before You Sign
Royalty structures fall into a few common patterns, and each fits different situations:
- Running royalties (a percentage of net sales) work well when the licensee’s success is unpredictable and you want to share in upside
- Flat fees work when volume is hard to track or when you want revenue certainty
- Minimum guarantees plus running royalties combine the two: a baseline payment regardless of performance, plus additional royalties above a sales threshold
Minimum guarantees are the piece most founders skip, and it’s the piece that protects you most. Without a minimum, a licensee can sit on your IP, do nothing with it, and you have no revenue and no ability to license it elsewhere because they still hold the rights.
You also need clear definitions of “net sales” for royalty calculation purposes. Licensees sometimes deduct marketing costs, returns, discounts, and a dozen other line items before calculating what you’re owed. Define this precisely, or the number on your royalty check will be smaller than the deal you thought you signed.
Audit rights matter here too. You should have the contractual right to audit the licensee’s sales records, with reasonable advance notice and typically no more than once per year absent evidence of underpayment. The agreement should specify who bears audit costs (often the licensee if the audit reveals underpayment above a threshold, otherwise the licensor) and how confidential licensee information is protected during review.
Reversion: Getting Your IP Back
Every licensing agreement needs clear terms for what happens when the relationship ends, whether that’s through natural expiration, breach, or the licensee simply failing to perform.
Reversion clauses should specify:
- Term length and renewal conditions (avoid automatic evergreen renewals without performance checkpoints)
- Termination triggers (missed payments, failure to meet minimums, insolvency, change of control at the licensee)
- What happens to inventory, materials, and derivative works created during the license period
- A wind-down period so the licensee can sell existing inventory without you losing all control immediately
Without solid reversion language, you can end up in a situation where your IP is technically still licensed to a company that’s no longer actively using it, blocking you from re-licensing to someone who would.
Why This Needs Ongoing Oversight, Not Just a One-Time Contract
Here’s the part that gets missed most often: licensing agreements aren’t “set it and forget it” documents. They need active portfolio management for the life of the agreement.
That means tracking renewal dates before they auto-renew on terms you no longer want. It means reviewing royalty reports against actual market conditions to catch underreporting. It means monitoring whether the licensee is meeting exclusivity performance requirements, and being ready to act if they’re not.
Elliott Alderman, who leads IP strategy on our team, spent years handling exactly this kind of ongoing licensing oversight, including content and technology licensing work from his time as former general counsel at a 200-person publishing company. His take, which I’ve come to agree with completely: the agreement you sign is only as good as the oversight behind it. A great contract with no monitoring is just a well-written document sitting in a drawer.
This is exactly why licensing strategy is part of our Premium tier IP portfolio oversight, not a one-time project. We review licensing agreements as part of ongoing counsel, not just at signing.
Getting Your Licensing Strategy Right
If you’re fielding licensing interest in your IP, or considering licensing someone else’s technology into your business, the agreement structure matters as much as the decision to license at all. Scope, exclusivity, royalty terms, and reversion rights work together. Get one wrong and the others can’t save the deal.
If you want a second set of eyes on a licensing agreement before you sign, or want to talk through whether licensing makes sense for where your business is right now, let’s schedule a call. You can reach us directly at (410) 531-9853 or visit garcia-zamor.com to set up time.
About Garcia-Zamor: We’re the general counsel and fractional general counsel for businesses and high end innovators, protecting both your business operations and your intellectual property. Ruy Garcia-Zamor (founder with 25+ years experience in patents, trademarks, intellectual property, business strategies and is a registered patent attorney with the U.S. Patent and Trademark Office), Elliott Alderman (40+ years experience in intellectual property and providing guidance to businesses), Claudia Castillo (decades of experience in business law focusing on all employment issues), and Amulya Annasamudram (focuses on patents and intellectual property and is a registered patent attorney with the US Patent and Trademark Office) Contact us at garcia-zamor.com or (410) 531-9853.
