Questions

In revenue based licensing deal, how can I make sure we are not being take advantage of when clients can't disclose information about their clients?

Hi, We are a start-up company that licenses software and gets a percentage of net sales. To make sure we get the percentage of the sales, we ask for a copy of the contracts. However, one client told us that the licensing fees of their clients is confidential, so we have to trust them. What can be done in these cases? In revenue based deals, how can I make sure I got the right revenue and we are not taken advantage of?

3answers

The question that pops up for me from your question is, "Why would you trust someone who isn't behaving like a partner?"

How common is this situation, where a licensee declines to share buyer contract info with you? I'm guessing very infrequent from your description of "one" licensee behaving this way. If that is so, and the far more common situation is a licensee agreeing to share the end user contract data with you to have fully accurate revenue data, then I would simply screen out those potential licensees who won't cooperate and not work with them.

If, however, your marketplace sees the resistance to sharing data as being more commonplace, I would review the structure of how your software is being delivered. The software licensing program could capture this revenue data so you wouldn't have to worry about trusting licensees. An example of a third party licensing program I've seen (to which I am not in any way affiliated) is https://www.licensecloud.com/

As another option, you could also dispense entirely with the idea of following licensees around and making sure they're telling you the truth about revenue. Restructure your billing system so you charge a profitable flat fee per end user, and leave it up to your licensees to sell the services for whatever they are able. This keeps you out of the business of looking over your licensees' shoulders and in my opinion is healthier in many ways over the medium and long term.

Revenue models are tricky to calculate and many intelligent people will miss expensive cost factors on the road to developing a price that truly makes them money.

I help businesses who have any kind of problem on the path of competently delivering a product or service to their customer. If you'd like to discuss this further, reply here and send me a message because I don't always check previous threads.

Thanks,

Jason


Answered 5 years ago

Hi ,as a corporate lawyer I have dealt many times with licensing agreement and there are two things that are typically a part of these kind of agreements: A. the first one is auditing rights - that allows you to check the other side's books at all time including by a professional auditor (and if there are big discrepancies between what was reported and the actual sales they need to pay not only the difference, but also interest, a penalty and the fee of the auditor). B. you sign a mutual NDA that the auditor is obligated by it as well. They can quietly reveal their fee as you are obligated to keep it confidential or at least someone on your behalf can review it.
The question is, if you are getting a percentage - won't you know there fees anyway? What is their alternative? If you want, you can make an estimation and charge them a fixed licence fee.
My guess is that you don't want this to fall through so you need to find a creative solution.
Good luck


Answered 5 years ago

There is usually a reporting mechanism that includes non-identifiable information. Besides, If they are a reseller of your products then you have a right to know who the end user licensor is for contract and legal purposes. I would make this a requirement in order to work with you.

Plus you should have a good non-circumvention type clause with some sort of liquidated damages to ensure there are adequate remedies if you find out that this is happening.

Let me know if you would like to review some more options,
Thanks,
Madhu


Answered 5 years ago

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