While some artists sell their work, other artists get money through royalties from licenses. This means that they offer someone else the right to copy their work in exchange for payments, while they retain ownership in the work. You should review your royalty contract carefully to make sure that you understand its terms. Also, you will want to monitor the licensee so that you receive all of the payments that you are due. Royalty payments are usually defined as a percentage of the money that the licensee makes from selling the products.
As an alternative, some artists assign their copyright in an artwork for a lump sum payment. This allows them to receive more money immediately, but they will not receive any further payments when the assignee sells products based on the work.
Calculating Royalty Payments
Generally, royalties will be a percentage of the net sales of the licensee’s products. The percentage will vary, but it is usually 10 percent or less unless the licensee is selling posters or prints of the artwork. Sometimes royalties are calculated not according to net sales but according to the total number of products that are sold or manufactured. This is known as a per unit royalty.
If an artist has a strong bargaining position, such as when their work has substantial popular appeal, they may want to arrange a guaranteed minimum annual royalty payment. This means that the licensee will pay the artist a fixed amount at the start of each year, which will not vary depending on sales. The artist then would receive any earned royalties above that amount at the end of the year. If the earned royalties fall short of the guaranteed payment, the artist will not suffer any losses unless the agreement provides that a shortfall will be applied to future guaranteed payments. These types of payments usually are worth arranging only if you are building a long-term relationship with a reputable entity.
Crafting Your Licensing Agreement
A licensing agreement will contain several types of provisions with specific terms. The complexity of these agreements varies widely, but there are certain basic issues that they tend to address. One of the issues that may be especially important to the artist is the advance against royalties. This is a lump sum payment made by the licensee to the artist when the agreement is finalized. It will be credited against future royalties, so you will receive lower royalty payments initially. If you do not earn that amount in royalty payments, you do not need to refund the advance. The agreement likely will provide that the artist needs to refund the advance only if they breach the terms of the agreement.
Some license agreements are structured to provide a one-time license fee rather than periodic royalty payments. This is generally not advisable for an artist unless they suspect that the products will not sell as well as the licensee hopes.
The licensee will want to include certain deductions in the agreement, which will determine the net sales. You can read more here about common types of deductions, but generally they cover items such as taxes, credits and returns, freight and shipping costs, and quantity discounts for larger purchases. Net sales are calculated by subtracting deductions from the licensee’s gross sales (the total billed to purchasers of the products), and then royalties are a percentage of net sales, so deductions can have a significant impact on the size of royalty payments. Sometimes a licensee may ask for unreasonable types of deductions, such as deductions for sales commissions and advertising costs. If you cannot agree on specific deductions but want to work out a deal, you may be able to agree on a set cap for the total amount.
Keeping Track of Royalty Payments
Before you finalize an agreement, you should feel confident that the licensee will behave ethically and provide you with royalties under the terms of the agreement. However, you should monitor its compliance with the agreement. You can establish your right to access the financial records of the licensee by including an audit provision in your agreement. This provision can require the licensee to pay for the costs of the audit if it reveals an error of a certain size. Similarly, you should include a provision that requires the licensee to pay your attorney fees if you prevail in a dispute over an audit or other royalty-related issues.