Licensing is a business arrangement that allows one party to grant permission to another party to use its intellectual property (IP), such as trademarks, patents, copyrights, or trade secrets, in exchange for a fee or royalties. Licensing provides opportunities for individuals and businesses to generate income by capitalizing on their valuable assets. In this article, we will explore what licensing entails and discuss various ways to make money from a license.
Licensing involves granting someone else the legal right to use a specific intellectual property while retaining ownership of the IP itself. The licensor (the owner of the IP) and the licensee (the party obtaining the license) enter into a contractual agreement that outlines the terms and conditions of use, including the duration, territory, and permitted activities.
Licensing can cover a wide range of IP assets, including:
- Trademarks: Licensing a trademark allows another party to use the registered brand name, logo, or other distinctive symbols associated with a product or service.
- Patents: Patent licensing grants the licensee the right to produce, use, or sell an invention protected by a patent.
- Copyrights: Licensing copyrights allows the licensee to reproduce, distribute, or display creative works, such as music, literature, or artwork.
- Trade secrets: Licensing trade secrets involves sharing confidential business information, manufacturing processes, or formulas with the licensee while ensuring its confidentiality.
Ways to Make Money from a License
- Royalties: One of the most common ways to earn money from a license is through royalties. Royalties are payments made by the licensee to the licensor based on a percentage of sales, revenue, or profit generated from the use of the licensed IP. Royalty rates can vary depending on factors such as the exclusivity of the license, the popularity of the IP, and market demand.
- Upfront Fees: Licenses can also involve upfront fees, which are one-time payments made by the licensee to the licensor at the beginning of the licensing arrangement. These fees can be a flat rate or a negotiated amount and serve as compensation for granting the license rights.
- Minimum Guarantees: In some licensing agreements, the licensee may commit to a minimum guarantee, which is a predetermined amount that the licensee guarantees to pay the licensor over a specified period. This provides the licensor with a minimum level of income regardless of actual sales or revenue generated.
- Cross-Licensing: Cross-licensing occurs when two parties with complementary intellectual property assets grant each other licenses to use their respective IP. This arrangement can result in mutual benefits and create new revenue streams for both parties.
- Franchising: Franchising is a form of licensing in which the licensor grants the licensee the right to operate a business using a proven business model, brand, and operational procedures. The licensor typically receives ongoing franchise fees or royalties from the licensee in return for support and the use of the established brand.
- Merchandising and Brand Extensions: Licensing can also involve extending a brand or intellectual property into new product categories or markets. By licensing their IP for merchandise or brand extensions, licensors can generate additional revenue streams by leveraging the popularity and recognition of their IP.
Licensing offers individuals and businesses a pathway to monetize their intellectual property and maximize the value of their assets. Whether through royalties, upfront fees, minimum guarantees, cross-licensing, franchising, or brand extensions, licensing provides opportunities to generate income while retaining ownership of valuable IP. By understanding the different ways to make money from a license, licensors can strategically leverage their IP assets to create mutually beneficial partnerships and unlock the full potential of their intellectual property.
What Is Licensing? and What Are Ways to Make Money from a License?
A license is basically permission. It is basically, how do I think about licensing? Just think about permission. So for example, if somebody owns a song and the copyright to a song and you get permission to use that song, you have a license.
Likewise, if you get a license, you have gotten permission. So license can seem confusing because we have driver’s license and hunting license and all these things, but the word permission helps make it a lot clearer, by the way, for a driver’s license, it means you have permission to drive. For a hunting license, it means you have permission to hunt.
And of course, every license has limits or a scope. So, for example, if you have a hunting license, it doesn’t mean you can hunt any animal you want. It doesn’t mean you can shoot anywhere you want. There are still restrictions on that hunting license. Likewise, when you have a license to use a song, there are restrictions on it.
So, a license is simply permission to use somebody else’s intellectual property. That intellectual property might be a trademark, a copyright, a patent, it could even be something else. But ultimately, a license is just permission to use somebody else’s intellectual property in a specific way that is authorized by the intellectual property owner.
Alright, how can you limit a license? You can get extremely creative because it is just a contract. So, can a license be done orally? Yes, you can give permission orally, like let’s say, for example, you know, the owner of a song and you say, “Hey, can I have that song play at my wedding? Is that okay with you? And can we do it for no charge?” And the owner says, “Oh yeah, sure. That is no problem.” Boom. We have a license. We have an oral license.
There might be restrictions on it though, and those restrictions in this scenario are, you can do it at the wedding. It doesn’t mean you can now re-release it and start selling it on Spotify and YouTube and as CDs. And you might say, “Well, how does that work if it is oral?” Like, a lot of times you don’t sit and discuss every little detail. Like, for example, if I said, “Hey, can I play your song at my wedding?” What are all the details there? Well, we don’t always have all the details, but a court will imply reasonable details.
So in other words, if somebody says at my wedding, a reasonable person would probably assume that is a specific event. If you get married five times, it doesn’t mean you get authorization at all five of them. Why? Because a reasonable person would probably assume it is for a specific event. And by the way, if that wedding is broadcast live and then recorded and you go on and sell the recordings, and let’s say you want to sell the little clip of the music, can you do all of that?
You might argue, “Well, hey, I got permission to do it at the wedding and they didn’t ask whether it is live and they didn’t ask whether I would be selling recordings of clips later.” But the court will imply reasonableness, and you might say, “Well, okay, how do you figure out what is reasonable? It is in the mind of the judge or the jury.” So you are going to have some third party or parties, judge and jury, deciding what would a reasonable person think? So it is not whether you can argue the technicalities. If details are not, either specifically discussed or expressly put in a written contract, the court will imply reasonable terms on that license.
I am Aaron Hall, an attorney for business owners and entrepreneurial companies. You can find more about me at aaronhall.com. You can get the free download we talked about earlier at aaronhall.com/free. And if you have questions to follow up from today, feel free to put them in the comment section below. I will either address them in a future live video session, or I will use your questions to create an entirely separate video to help you and other business owners, educating you to help make your company better and hopefully improve your success in life. It was a pleasure talking with you here today.