Yea, though you may walk through the alley of the shadow of debt, show no hunger. You need to think like a person who can walk away from a deal. Prepare yourself to postpone immediate gratification for long-term goals. Too many amateur negotiators suffer from “sellitus,” an affliction that forces them to make a deal at any cost.

Avoid the temptation to overwhelm. You must not be perceived as either an egomaniac or a victim. The image you want to portray is that of a person who is modest, honest, generous, hospitable, and maybe a bit eccentric. Show yourself as a down-home person with a penthouse personality.

Let’s look at some points I feel deserve explanation. These are in no order of priority once you get past the section on indemnifications. I put this first because it needs to be uppermost in your mind, even ahead of advances and royalties.

In my opinion, this is the most important part of any agreement from the inventor’s standpoint, because it can be a minefield in terms of personal risk. The last thing you want is to have to reimburse a company for losses and expenses.

In some agreements, mere claims of wrongdoing can trigger all kinds of nightmares for inventors. I have seen agreements that allow a licensee to hold up inventor royalties if someone simply claims, through a letter to the licensee, that a licensed invention infringes someone’s patent. I have seen where a claim in a foreign country stops royalty payments generated in the United States. How unfair is that? Adding insult to injury, this agreement did not even require the licensee to pay interest to the inventor on held funds. Nor did it have a time limit on how long funds could be held. By the way, nothing stopped the licensee from continuing to manufacture and market the guy’s invention.

Licensees have insurance, for product liability, errors and omissions, and so on, to protect themselves against all kinds of problems. Inventors typically do not self-insure. This is such a critical part of any license agreement that I highly recommend you have competent legal counsel review requests for indemnification you are asked to sign. The last thing you want to do is lose personal assets, such as savings or worse, because you get entangled in a liability fight.

You cannot indemnify against future damage from submarine patents (read more about submarine patents in Chapter 11). No one can do this. You can search prior art until the cows come home and never gain access to as-yet-unpublished patents. The good news is that until and unless another patent appears that reads on your invention, you would not owe that inventor or patent holder any money for past royalties. If a patent issued that conflicted with your patent or product, you’d have to deal with it from that point forward.

Your licensee should not balk at covering you under an appropriate insurance policy. Usually this merely involves a letter from a licensee to its insurance company. It’s as easy as adding another driver to a car policy. It should not increase the cost of the policy(s) to the licensee, nor require any expense.

You’ll want to describe your invention as broadly as possible. Start extreme. Cut it large and kick it into place. You’ll be able to edit the definition and work it to everyone’s satisfaction.

If you open with too narrow a definition, it becomes difficult to introduce new ideas at a later time.

If you cannot make an unqualified statement to certain warrants and representations, insert the words “to the best of my knowledge, information and belief” as in this example:

Only license to a company that is capable of exploiting the rights covered it is willing to break out and pay for on an individual basis. Don’t allow the company to cast a wide net. Part of every agreement should be the following stipulation:

You want the agreement to continue for as long as the product upon which royalties are payable to you, under provisions of the agreement, shall continue to be manufactured or sold by the licensee.

Many companies may try to tie your royalty term to the life of your patent. This is nuts. Why should you suddenly be cut out of the action just because a patent expires? This is easy to handle if the license is not dependent upon your being issued a patent. If it is, the manufacturer will claim that, without patent protection, competition will cut into its profits. This is a sound argument.

As a compromise, agree that—after the patent turns into a pumpkin—if there is solid evidence of market erosion from competitive product, you will take a reduced royalty based on a sound mathematical formula.

The size of the advance is usually in direct proportion to the kind of support the company will give your product. For example, if you are paid $1,000, it is much easier for a licensee to deep-six your project (say, in the face of a manufacturing problem) than if it had paid $100,000. The greater the financial commitment, the more reason the company has to make the product go.

Frequently, advances are based on a third or a quarter of the first-year sales. This is a starting point, but there are always exceptions.

Advances should always be nonrefundable. In other words, if you deliver an acceptable prototype, you keep the money no matter what happens downstream.

Every industry has its own royalty scale. Whatever that number is, the key to your agreement is how sales upon which the royalty is based are defined. Never sign an agreement that does not define in detail exactly how your royalty is to be calculated.

To make a sweeping generality like “net sales” and not define it is unacceptable. This can easily become a minefield.

Do not be timid about suggesting a sliding royalty scale. For example, if the industry standard is 5 percent, ask for an increased royalty if the product performs past a certain level. Find a magic number that can trigger a higher royalty.

By the way, in some industries, product that is manufactured and delivered to a buyer overseas earns a higher royalty for the inventor. Why? Because the licensee does not incur costs such as shipping product across from Asia and warehousing it. For example, many large retailers buy product in Hong Kong and have it consolidated and shipped across at their own expense, as a way of getting a better price from the manufacturer.

The guarantee is negotiable and should be based upon what the company forecasts in sales over the term of your pact.

You need to be sure your agreement requires the licensee to use its best efforts. I recall once when a lawyer tried to change the language in a contract of mine from “Licensee’s best efforts” to “Licensee’s reasonable efforts.” I responded by asking how he would feel if a surgeon promised to use his or her reasonable efforts when operating on him instead of his or her best efforts. I won the point, but even so, not without a struggle. Obviously, there is a significant difference in the legal meanings of these terms.

There needs to be milestones. Every right you license requires its own performance parameters. In this way, if the licensees fail to perform some function, you have an escape route.

Every agreement you sign needs a way out in case a licensor isn’t getting the job done. Licensees can fail to meet product introduction dates, miss payment and/or reporting deadlines, and so forth.

If you are asked for foreign rights, make each country a separate deal in terms of specific performance and, if possible, advances and guarantees. In this way, the licensee will not take anything for granted. The company will know that it needs to pay attention to your product everywhere, not just at home.

Demand that your licensee conduct its own patent, copyright, and trademark searches and satisfy itself that your invention does not infringe anything in any of these fields. Make a part of your agreement the fact that the licensee did its own search.

Always require the right to audit your licensee’s books of account. Never sign an agreement without this clause.

I do not recall how many times I have opted to audit licensees, but except for once, we have always found money owed. In these cases, it was either human error; if done intentionally—for example, to show increased income for a certain quarter—no one tried to hide anything. As my auditor likes to say, “They don’t hide their omissions—they just don’t give me a road map to find them.”

Once I was negotiating with a corporate lawyer who did not want to allow me to audit. After I explained why I had to have the right, he agreed. When I asked why the company didn’t simply add the audit clause to its boilerplate, he answered, “Then everyone might want to audit and we don’t have the time to deal with it.” What a stupid answer, and how shortsighted. In the end, I did not sign with this company. That was a bad sign.

Insist that interest plus extra points be applied to late royalty payments. Here’s why. Some corporate financial types like to play games with royalties. They hold them up to get the benefit of some extra float from your money. If the licensee has no obligation to pay interest on late payments, there is no incentive to pay on time. And if all the licensee has to pay is interest, you are essentially giving the company a free loan, and without the hassle of making application to a lender.

But if the licensee has to pay you interest plus a couple points over prime, for example, this will cost the company money, and it’ll be more likely to pay you on time.

Whenever possible, I like to write my agreements in such a way that if I put the licensee on notice for the same problem three times, I can break the agreement. This is only fair.

Furthermore, if there are conditions beyond the licensee’s control, I’ll allow a certain amount of time for the cure and then it’s over.