I am wrapping up this series by combining Part 6 and 7, partly because they are so closely tied to one another and partly because I am overdue in finishing this series.
So, when we last left off, we had our item in for review and the PD team was making a decision on our item. This time, we received great news and the company is planning to move forward with us. Time to take a moment and really relish this success…let it sink in and enjoy the validation that comes when someone likes what you are creating. In an industry that is more about NO than YES, it’s important to take a sweet, brief moment to savor the mountain that you just conquered.
We conquered the mountain at Winter Park, CO
Ok, moving on, there’s so much more to do.
At this point in the process, it becomes a personal decision for the inventor on how to handle it from here in terms of advances and royalties and the relationship with the licensor. Do you want as much as possible? What are you willing to give up? How flexible will you be in the negotiations? How involved do you want to stay? Where do you want the future of this new relationship with this company to go?
Right now, I want stop and put in a book recommendation for anyone interested in inventing. It’s by my new acquaintance and fellow Illinois State University graduate, Ron Weingartner, and his colleague, Richard Levy. The book is “The Toy and Game Inventor’s Handbook: Everything you need to know to Pitch, License, and Cash in on your Ideas”. It’s is an in-depth look at everything this series has covered and more, more, more. It will become an absolutely invaluable resource. It’s should be on every inventor’s bookshelf! Go buy it today. Seriously.
Well, from here, the path can take many directions and I can only share what we have experienced, which may be very different from other inventors. Please note, it is completely recommended to have a lawyer consult and review any contracts for you, especially if you are new to inventing.
We feel strongly about trying to get Advances on the deal. As Ryan concisely puts it, an Advance “makes sure they have some skin in the game” and are invested in the item. Many smaller companies have a harder time with offering an Advance or others simply refuse to do it. This, then, becomes a decision on whether or not you want to see your item move forward with their company. Other questions to consider are: how well can they execute it? What are their distribution outlets? How many units can they move? Are they asking for Worldwide rights or just North America? Can you sublicense it out to another licensor? What about 3rd party licenses? (Seriously, get the Inventor Handbook, there is so much to cover)
Our general formula for Advances requires a bit of prior knowledge about manufacturing and the retail marketplace, but is simple and, in our minds, fair to all parties. In easy, round numbers, here is an example of how we figure an Advance:
Let’s say the CEO told you they anticipate selling 100,000 units in the first year and the item will be $10 on store shelves. This means they would roughly be selling it to the retailer for around $5. You asked for a very typical 5% royalty on the deal, so you will earn $.25 per item and around $25,000 the first year in royalties. If you estimate 20-30% on an advance first year royalties, that puts the advance at $5000-$7500 and this number will be subtracted out of your first year royalties.
We try to stay open to all options during the negotiation process. Some might see it as a game, some might see it as something to lose sleep over. Ultimately, the company wants something from you and you want to give it to them. So, do what you can to make that work and be sure to read the fine print.
Congratulations! You negotiated the deal you wanted and the ink on the contract is drying. (Ryan and I usually do a little happy dance at this point and go out to dinner.) You should start looking at Lamborghini’s because now you are going to be rich, right? Hmm, well, this is the assumption most people make about inventors. If you have licensed an item and it is in stores, then you MUST have made a lot of money?! (Can you hear me sniggering at this?) Let me be clear: a license DOES NOT guarantee piles of money and you shouldn’t plan on it. Why not, you ask? Here’s a few reasons: many items never make it to production, buyers for the store didn’t like it and didn’t buy it, items don’t sell like they predicted, they design the item with the wrong spring and it doesn’t work right, and a million other reasons why. Please don’t begin inventing for the money, you’ll be sorely disappointed. Begin inventing because you look forward to watching a kid pick up your item in a store and ask their mom if they can have it, because it’s fun, and, most importantly, because you have a knack for it.
Sure, there are huge hits that have made an inventor a crap ton of money (that’s an official measure). You read about those toys in magazines and see them hyped at Christmas as the “Hottest Toy” of the year. Yay for those inventors! Seriously, I hope we’re that lucky someday. However, for most of the inventing community, it’s an amazingly rewarding job that we work tirelessly at in order to make a decent living and bring some fun to some kids along the way. It’s a job that doesn’t offer a 401K, health insurance, or a pension. So, before you quit your job, make sure you have a creative mind, nerves of steel and a strong sense of adventure because you’ll need it for the wonderful story you can write for yourself if you want to grow up to be a toy & game inventor.
The future is called “perhaps,” which is the only possible thing to call the future. And the only important thing is not to allow that to scare you. ~Tennessee Williams, Orpheus Descending, 1957