Prepaid Royalty Agreements
Writers, inventors and others who live off the royalties from their creations are familiar with royalty contracts. They are agreements between the creator and the buyer for a percentage of each unit sold. For example, a 10 percent royalty means that the creator receives 10 percent of the money that a consumer paid for each unit. The agreement specifies when and how the royalties will be paid. A prepaid royalty agreement does the same thing, but the royalty is paid before the book or unit is sold and not after.
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Significance
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Prepaid royalty agreements cover royalties that are negotiated before the creator’s work is sold to the public. The agreement has additional clauses that cover unsold units on which royalties were prepaid, royalties for units sold beyond the prepaid amount and an expiration date.
Function
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Prepaid royalties are a negotiation tools used when a buyer tries to acquire the rights to books, invention or other creative product like a song or software. Creators use the prepaid royalty agreement as a payment for the time spent developing their product.
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Prepaid Royalty Estimates
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Buyers estimate the prepaid royalties for the agreement based on how many units that they think will sell offset by the cost of promotion and production. When negotiating the prepaid royalty agreement, the buyer tries to keep the number as low as possible, while the creator usually tries to negotiate the highest prepaid royalty possible. The number that makes it on an agreement signed by both parties is the amount that will be paid.
Features
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The prepaid royalty agreement specifies how much the prepaid royalty amount will be, when it will be paid and what types of sales it will cover. The expiration date is the date that the contract will terminate. It isn’t a concrete date, but a specific time period. For example, the prepaid royalty agreement may expire after three years of no or low sales. The royalty agreement also specifies the percentage royalty that the creator will receive once the units sold surpasses that estimated.
Considerations
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Prepaid royalty agreements are like a lump sum payment, while a traditional royalty is like an annuity. The same advantages and disadvantages apply. The traditional royalty is paid in annual or biannual payments as long as the product is selling. The payments are large or small based on the sales for that royalty period. The prepaid royalty is one payment that may or may not be your last, depending on how many units are estimated on the contract. Some inventors, writers and others do not see payments beyond the prepaid royalty, because the unit sales amount is not reached.
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References
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