Should Inventors Split Royalties?

Carrie Jeske

12 years ago

Split royalties is it’s going to make you more money. Have of something is better then all of nothing.

Should Inventors Split Royalties?

Hi Carrie,

Thanks for giving my contact information to Rose. She has skills in marketing that I don’t have and need, and has suggested partnering in the endeavor of getting my baby coat to market. She suggested a 50/50 split and I was wondering if this was normal? I feel that I really need someone like her to help me, but also that the invention is mine and I intend to pay for the initial production of the coat. I would appreciate your opinion on such a partnership. Hope all is well with you and your family.

God’s Blessings

Jane

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Jane, I’m glad to hear you’re making progress. Here’s my thoughts.

Team Member Splits –

50/50. There’s nothing wrong with that as long as you are both doing a fair amount of work. Having the help of partners or a management team can be valuable. The 50/50 should be out of the pure profit number, less expenses such as marketing, inventory, etc. If she’s going to incur expenses for marketing she should pay for that from her own money since you’re paying for inventory and keep receipts for future reimbursement.

You keep control of inventory at your location, in case things ever go south, you don’t want to have to track down product. That means you’ll have to do the shipping, which is a pain when volumes get higher. However, the hope is that volumes do get high and that you either end up licensing the patent and just collecting royalties, or you continue to build the business with her, taking all revenue in and paying all expenses out of.

Whatever you do, keep track of every dime you spend on your own money. You should account for money going in as a loan from shareholder (you). Hopefully one day the company will pay you back, plus interest. You can keep track of any money she spends as simple expense. You are the owner and 100% equity shareholder of your company and patent, regardless of how you end up negotiating compensation for team members, partners, etc.

Standard Sales %

Straight commissioned only sales people normally make 10% of wholesale value. Distributors usually want 30% gross margin. Online retailer and brick and mortar retailers usually want 50% gross margin. All these are on the Expense side of your accounting records, in one category or another.

Timeframes & Sales Goals

Also, there should be a goal set for sales with a timeframe attached. If the min sales are not made by x date then the agreement is void.

Intellectual Property

Finally, do not agree to any ownership of the patent. You are the patent owner always. You simply license the use of the patent to others for an agreed upon royalty. In this case, it’s more of a management partnership for marketing purposes, but the patent should always remain yours. What most people do is form a third company and have the inventor license the patent rights to that company. The agreement for profit split is between her and the company you set up, less expenses. There are other ways to do it and I’m not a fan of a lot of legal fees or corporate complications at the early stage. You do want to be certain you’re comfortable with worst case scenarios though, by reducing the risk of them.

Having help is a good thing, if you have an intuition of integrity and get everything agreed to in writing without a lot of legal headache. The agreement should be simple and easy to understand by you both.