Should you be fortunate enough to be extended a licensing agreement by a toymaker, take to heart some words of advice from Howard R. Fine, Esq., of Northbrook, Illinois. Howard is the former senior vice president and general counsel to Tiger Electronics (a division of Hasbro, Inc.) and one of the best and brightest lawyers in the industry.

According to Howard, the most important leverage a toy inventor has is the ability to terminate the license agreement. Consider all the specific tasks you would like the toy company to complete and all the milestones you would like the toy company to achieve, and be sure you can terminate the agreement if they are not met.

Although long-term contracts are acceptable and often desirable for building a brand, be sure they are contingent upon the achievement of ongoing, objectively measurable performance standards, such as annual royalty thresholds or payments.

Although it may be reasonable for a licensee to require 30 or more days to cure some breaches, there is no reason anyone needs this long to write a check that is already late. Limit the cure period for payment breaches to no more than 5 or 10 days, and encourage on-time payments by providing for interest or late fees.

Some licensees will make you beg for your royalties every quarter. To avoid the maddening trap of the “serial breacher,” include a provision that waives any cure period and allows you to terminate the agreement immediately after the third or fourth breach.

Limit the number of deductions the licensee may take from its gross receipts when computing your royalties. Your licensee is realizing the vast majority of the income (usually 95 percent of it) and should be absorbing most of the expenses as well.

When you’re licensing a toy concept, be sure you get paid on not only the core item, but also any accessories, line extensions, and any other products derived from or meaningfully associated with it.

Many successful toy and game brands are expanded into entirely different categories, and even entertainment properties such as movies and associated merchandising. Be sure you participate in the revenue streams for all of them, as none would have existed but for your original contribution.

Try to limit your financial liability as much as possible. Although the ability to do so will vary considerably from deal to deal, at the very least, try to avoid liability in excess of the royalties you will be paid.

If you have partners—more than one person or entity as the “Licensor”—try to limit your individual liability to your proportionate share in the project. Otherwise, you could be liable for 100 percent and have to sort it out among your partners. Likewise, be sure you have an agreement among your partners regarding this issue.

Don’t give up your right to sue in court by agreeing to mandatory arbitration. If your licensee is not paying you or is misusing your intellectual property (the two most common problems), you will want to keep all your options open, including the ability to sue. You can always agree to arbitrate later if it is to your benefit.