Licensing Agreements: The Small Business Guide to Protecting Intellectual Property

Written By Renaud Laliberté

Whether you are a startup founder with a patented invention or a brand owner looking to expand through trademarks, a licensing agreement is your most powerful tool. In simple terms, this legal document outlines exactly how your intellectual property (IP)—such as a trademark, patent, or copyrighted work—can be used by another party.

For SMB owners, getting this document right is critical. It defines your revenue streams, protects your brand reputation, and prevents costly legal disputes down the road.

Below, we break down the top 6 elements you must include to ensure your agreement works for you, not against you.

1. Clear Definition of the Licensed IP

The foundation of any licensing agreement is a precise definition of what is actually being licensed. Ambiguity here is the number one cause of disputes.

  • For Trademarks: The agreement must list the exact wording, logos, and designs (often attached as exhibits) and specify exactly which goods or services the mark covers.

  • For Patents: You must include the patent number, the specific invention covered, and the issuance date.

Practitioner’s Tip: Before signing, verify that the licensor is the rightful owner of the IP and that it isn't subject to any public infringement claims. You can do this by conducting a simple trademark or patent search.

2. The License Grant (Scope of Use)

The "License Grant" section outlines the specific rights and permissions being transferred. This is often considered the most critical element of the entire agreement.

You need to clearly define:

  • The Scope: What geographic areas are covered? What specific industries or product types are included?.

  • The Conditions: Are there sales targets? Revenue goals? Pre-determined fees that must be paid to maintain the license?.

3. Exclusivity Rights: Who Else Can Use It?

One of the biggest strategic decisions you will make is whether the license is exclusive or non-exclusive.

  • Exclusive License: You grant the licensee the sole right to use the IP in a specific market. You cannot license it to anyone else in that space. This creates a competitive advantage for the licensee but limits your own revenue channels.

  • Non-Exclusive License: You retain the right to license the same IP to multiple parties. This increases your revenue potential but creates more competition for your licensees.

SMB Strategy: If you grant an exclusive license, limit the scope, duration, and territory as much as possible. It is also wise to include performance clauses—if the licensee fails to meet sales targets, you reserve the right to terminate their exclusivity.

4. Royalties and Payment Terms

How will you get paid? Your agreement must detail the initial payments, ongoing royalties, and exactly how those royalties are calculated (e.g., percentage of sales vs. flat fee).

Given the current economic climate, consider these protective measures:

  • Inflation Adjustment: If you are agreeing to flat fees rather than percentages, use an inflation-based approach to ensure your revenue doesn't lose value over time.

  • Audit Rights: Always include provisions for audits and record-keeping. You need the right to check the licensee's books to ensure they are reporting sales accurately and paying you what you are owed.

5. Term and Termination

How long does the agreement last, and how can you get out of it?.

While it is standard to include a "termination for breach" clause (e.g., if they stop paying royalties), you should be wary of "termination for convenience" clauses in long-term deals.

  • Termination for Cause: This protects you if the other party fails to deliver.

  • Termination for Convenience: This allows a party to walk away without a specific reason. For SMBs investing heavily in a partnership, unilateral termination for convenience is risky and should generally be avoided.

6. Representations and Warranties

These are the legal promises made by both parties. Typically, the licensor must warrant that they own the IP and that, to their best knowledge, it does not infringe on anyone else's rights.

If these representations turn out to be false, the other party usually has the right to terminate the deal or sue for damages.

Practitioner's Tip: Review this section carefully. Only make promises you can keep with 100% confidence. These statements must align with the reality of your intellectual property.

Need Help Drafting Your Agreement?

A licensing agreement is more than just a document; it’s a revenue strategy. If you need assistance reviewing a grant clause or structuring a royalty deal that protects your bottom line, contact me today.

Glossary of Key Licensing Terms

  • Licensor: The party that owns the intellectual property (IP) and grants permission to another to use it. In most cases, this is you (the business owner).

  • Licensee: The party receiving the rights to use the IP. They are the ones paying the royalties.

  • Royalty Audit: A contractual right that allows the Licensor to inspect the Licensee's financial records. This ensures the Licensee is reporting sales accurately and paying the correct royalty fees.

  • Termination for Convenience: A clause that allows a party to end the contract without a specific reason (like a breach). Warning: SMBs should generally avoid granting this right to licensees in long-term deals, as it undermines the security of your revenue stream.

  • Exclusive License: A specific agreement where the Licensor promises not to grant rights to anyone else in a specific market or territory—including themselves. This should always be delimited by a specific territory and accompanied with measurable performance metrics.

  • Grant Clause: The specific section of the contract that defines the scope, territory, and limitations of the rights being transferred.

Frequently Asked Questions

  • An exclusive license grants the licensee the sole right to use the IP in a specific market; even the owner cannot use it there. A non-exclusive license allows the owner to license the same IP to multiple different parties simultaneously.

  • Royalties are usually calculated as a percentage of gross or net sales. However, flat fees are also common. In the current economic climate, it is wise to adjust flat fees for inflation to ensure the revenue value doesn't decrease over time.

  • If a licensee can terminate "for convenience," they can walk away from the deal at any time without a reason. This creates high risk for the licensor, especially if you have invested time or resources into the partnership. It is safer to only allow termination for a specific breach of contract ("cause").

Renaud Laliberté