Pay or play - licensing mistakes and how they cost you big time

Okay you've sold your idea to a big company for $1 a unit they fit it to..... and they make millions each year. Just before you start driving away in your Ferrari though, you realise they aren't building any units with your baby incorporated. What's worse, you can't get the idea back from them. You've been caught in the pay or play trap.

It's actually very easy to kid yourself that this won't happen to you. Our unit saves 10% of this, reduces that by 30%, makes it all much nicer, faster, stronger or whatever but think again. Say you are working with the leading manufacturer in a market, they have invested in making their product in a particular way. Changing all that will cost money. If one of their competitors had your idea then the leading company might be forced to change to follow suit, but now they have your idea effectively out of the game and can carry on as they are.

So simple rules for this simple game.

Get an agreed sales forecast that the company licensing/buying your idea must achieve. If they miss a quarterly target then allow them some time to come up with a remedial plan (that you can accept or reject at your discretion) - remember you don't want to kill the relationship unless you have to. However if they are not hitting the targets then you should have a clause that the idea reverts to your ownership. This should also be the case if they go out of business, have a change in ownership etc.

If you can get an upfront payment for a license then remember this can be very valuable. You get money into the company without giving away any equity - gotta be good right? Well sometimes - you should be able to figure out if it is good for you in your current situation.

Exclusivity is a subtlety that is worth considering. If you give it away to a small player you may find that you have lost time in the market when they don't meet targets. However, again, exclusivity can be treated as something a partner retains if they hit sales targets. If they drop below these you should be able to withdraw it (at your discretion).

It can be a bit tedious to work through but getting it wrong will kill your business stone dead so stay awake - there may even be a quiz at the end.