Royalties are the payment a licensee makes to a licensor for the right to use intellectual property. They can be a percentage of revenue, a fixed amount per unit sold, or a lump sum payment. Getting royalty rates right is critical: too high, and the licensee can't profitably commercialize the IP. Too low, and the licensor leaves money on the table.
Running royalties and tiered structures
Running royalties are a percentage of net revenue (typically 2-8%) each quarter or year. This ties payment to success. Tiered structures incentivize the licensee to sell more: as the licensee scales, the licensor's percentage increases, aligning incentives.
Calculating net revenue for royalties
The royalty clause must define what "revenue" means. Licensors prefer gross revenue; licensees prefer net revenue (after returns, discounts). Your licence agreement must be specific about deductions allowed.
Minimum royalties and audit rights
A minimum royalty guarantees the licensor a baseline revenue regardless of sales performance. Always include an audit clause allowing the licensor to verify royalty calculations. Without it, you can't check if the licensee is under-reporting sales.
Benchmarking fair rates
Royalty rates vary by industry: Software/SaaS 10-25%, Pharmaceuticals 2-8%, Trademarks 2-5%, Manufacturing patents 2-5%, Copyright 10-15%. Your rates depend on technology maturity, market size, IP strength, exclusivity, and industry norms.
When reviewing or negotiating a licence, compare your royalty structure against industry benchmarks. QuickLegalCheck can help you understand whether your rates are competitive and flag ambiguities in how net revenue is defined.