The royalties derived from licensing artwork can be substantial, especially over a long period of time, assuming the product has a steady demand and the artist negotiated a good royalty rate. But what is a good royalty rate and how can it best be negotiated with manufacturers, publishers, and producers?
There's no great mystery to royalties—you've created a piece art (writing, painting, music, etc.) that someone else wants to sell, so you should naturally get a share of the profits. But make sure the rate you receive isn't less than favorable or you could be giving up more rights than you think.
The Bare Minimum
For those artists just getting started, here's a crash course in basic do's and don'ts:
When negotiating a licensing deal, or when simply reading a contract offer, you may see terms with which you aren't familiar. such as "advance against royalties." An advance against royalties has a two-step meaning. First, you get an advance from the licensee based on the contract (this advance is non-refundable). Second, that advance will count against any future royalties the company owes you until the advanced amount is reached. After that, you'll receive royalties on a regular basis, according to the contract.
For example, if the advance against royalties is $5,000, then you'll:
How Royalties are Calculated
Royalties are calculated differently according to the industry (i.e., music, manufacturing, publishing), but they all must honor the royalty rate that you negotiate. Negotiating a good royalty rate is obviously the key to the entire process.
For example, if you have negotiated a rate of 5 percent and the sales equal $10,000, then you will receive $500 in royalties. Sounds simple, but is the 5 percent based on gross sales or net sales? And if there are expenses in marketing or selling the products, do they get subtracted from the sale amount?
Negotiating a Good Deal
Gross vs. net sales will likely be a source of contention between you and the licensee. Gross sales is the total dollar amount of customer purchases. Net sales is that total amount minus certain deductions such as taxes and shipping costs.
The licensee will want the royalty rate to be based on the net sales while it's most beneficial to you to base the royalties on the gross amount. Your relative bargaining strength (perhaps your art has a huge demand) will determine how hard you can push for your terms.
Assuming that you've agreed to base your royalty rate on net sales, you should try to limit the deductions that the licensee can take when calculating the net sales amount. It's customary to deduct sales tax, discounts, and even shipping costs from the gross amount, but don't let the licensee deduct things that are out of your control and have nothing to do with your art. Other examples of deductions you should avoid include sales commissions, instances where a third party orders but then fails to pay (again, that's their business, not yours), and any "fees" the licensee may try to tack on.
When negotiating your royalty rate, you'll want to know about the general demand for your work, as well as the going rate for the industry. To do so, you'll need to do your homework and consult with others in that industry and find resources on licensing rates.
Also, consider not only the royalty rate, but the volume of products which you expect to be sold. You may negotiate a great rate, but if the sales are low, your high rate is meaningless. For example, if you're dealing with a well known brand, they may be willing to pay a smaller rate, but because they sell so much volume, you'll probably end up with a greater royalty in your wallet.
In the event that you believe there's a discrepancy between your royalty checks and what you believe you're actually due, your contract should include an auditing clause. An audit is simply an outside party inspecting the books to determine whether you're receiving your full due. Since audits aren't cheap, the best case scenario for artists is to include language that states the licensee will pay for audits. A frequent compromise is that the artist pays initially pays for an audit, but if the discrepancy is found to be over 10 percent, the licensee must pay for the audit.
Licensing your artwork can be a confusing process, especially when you are at the bargaining table. Seek out the assistance of a business and commercial law attorney to help you negotiate royalties and other licensing matters.