IP 101: The Fundamentals of IP Licensing

Intellectual property can be just as valuable as (or more valuable than) physical property. This is because intellectual property (IP) can be shared with others (in the form of an IP license) in exchange for royalty fees – producing a valuable source of passive income for IP owners. 

What is an IP license & how does it work?​

Any form of intellectual property – from trademarks to patents to copyrights – can be licensed to third parties. Through licensing, an IP owner grants third parties the right to use their IP, while retaining their ownership. Usually, the IP owner (the licensor) receives payment in the form of royalties for granting another person (the licensee) the right to use their IP. 

Another way to think of IP licensing, is the “leasing” of intellectual property for a fee. Unlike IP assignments which transfers all ownership of IP, licenses provide only limited use – enabling licensees to benefit from IP while protecting the ownership rights of the licensor. IP owners can receive royalties for their licensed IP for their lifetime and 70 years after passing (such that even the families of IP holders can benefit from license agreements). 

Different Forms of IP Licensing

There are 3 primary forms of licensing agreements – each providing slightly different rights, advantages, and disadvantages. 

1. Exclusive Licenses: grant a third party the exclusive right to use the intellectual property. The IP owner cannot use the IP or grant any other third parties the right to use the IP. 
2. Sole Licenses: grant a third party the right to use intellectual property, while prohibiting the owner from allowing other third parties to use the IP. The IP owner may still use the intellectual property themselves, however. 
3. Non-exclusive Licenses: grant others the right to use intellectual property, without restricting the owner from using the IP themselves or granting licenses to other third parties. 

You can also combine elements of each of these types of licensing agreements, creating your own custom form of licensing. For instance, some licensing agreements may be non-exclusive country-wide, but provide exclusive licenses within a certain geographic area.

What are the advantages & disadvantages of an IP license?

There are a number of pros and cons of licensing intellectual property.

On the positive side, licensing IP can:

• create passive income for the IP owner
• enable a licensor to tap into local markets, a licensee’s productive capacity or unique marketing strategy
• create new business opportunities for both licensor and licensee
• enable businesses to enter new markets or industries

As with every commercial endeavor, licensing agreements aren’t without their drawbacks. Here are a few disadvantages of licensing intellectual property: 

• The licensor may lose some control of their intellectual property, particularly with exclusive licenses
• People abuse some licensing agreements which can lead to IP infringement
• Depending on the nature of the licensing agreement, some licensors may be fully dependent on the licensee’s ability to generate revenue with the IP
• A licensee’s actions could damage the reputation of the brand or product

How do I license my intellectual property?

The first step is to ensure your intellectual property is registered and protected in the form of a trademark, copyright, or patent. Then, you can start marketing to (or identifying) potential licensees.
Once a third party expresses interest in commercializing your product or idea, a licensing agreement will need to be negotiated to ensure your rights are protected.

What is a typical licensing fee?

“Typical” licensing fees vary based on the IP that is being licensed. Also, the percentage of sales a licensor retains depends on negotiating skills (and the industry). For instance, “royalty rates” for consumer products may vary between 2-10% of the product’s sale value. Franchises, on the other hand, may require royalty payments of anywhere from 1-50% of total volume. 

If you’re interested in licensing your IP (or licensing someone else’s IP) it will be important to work with a seasoned professional who can help you negotiate a licensing agreement that works for you. 

Disclaimer: Nothing in this article shall be construed as legal advice, or as creating an attorney/client relationship.

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The Michelson Institute for Intellectual Property, an initiative of the Michelson 20MM Foundation, provides access to empowering IP education for budding inventors and entrepreneurs. Michelson 20MM was founded thanks to the generous support of renowned spinal surgeon Dr. Gary K. Michelson and Alya Michelson. To learn more, visit 20mm.org.