What is a license fee?

 

A license fee is a charge paid when a licence agreement is made between the owner of the invention and the third party.

The method of payment of the fee is not limited and can be agreed by the parties, taking into account all their wishes and needs.

Most licensors want some form of lump sum payment at the commencement of the license. Sometimes this is the only consideration paid by the licensee, as in the case of a fully paid-up, perpetual license.

The licensor may also require continuous periodic fee payments (“royalties”) which are paid on any regular basis (monthly or annually). The royalties provide a continuous stream of revenue to the licensor. Such money can be used to pay for further development of intellectual property

Royalty amounts may be fixed (particular amount per year) or variable (particular percentage per unit sold). Royalties may also provide for the licensee’s ability to recoup the upfront license fee by delaying payment of royalties until such time as the royalties payable are equal to some portion of the upfront license fee paid.

The fees paid by the licensee may also be triggered by specific milestones. For example, when the particular amount of units are sold or particular revenues generated. The licensee isn’t required to pay unless it can make commercial use of the intellectual property, while the licensor can demand higher royalties for each additional regulatory stage, depending on the success of the licensee.

The royalties or payments for the license must always be reasonable. The following factors shall be considered:

  • Existing royalty rates in the business or industry on similar technology;
  • Expected market penetration and volumes.
  • Research and development costs;
  • Nature of rights granted (e.g. exclusive vs. non-exclusive…);
  • Capital costs to start using the technology;.
  • Possible risks;
  • Nature of technology (i.e. needed or not improvements) and state of technology (i.e. prototype or working method);

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