Innovate or Perish: Managing the Enduring Technology Company in the Global Market

Approach 2: Royalty Rates Based on Earnings for Early-Stage Technology

There are many references in the literature to the “25% rule” being a good starting point in licensing negotiations.^[24] That is, 25% of the EBT on a product is a reasonable licensing fee provided certain conditions are met. In fact, a recent survey incorporating actual chemical industry profitability and royalty rates concluded the average to be 25.9% during the period 1990–2000.^[25] Therefore, using the “Rule,” a reasonable royalty rate for chemical industry technology would be 25% of 10% (per Section 1) = 2.5% of sales. The certain conditions required include the “background” and “future” value streams provided by the licensor discussed earlier. An additional discussion on the normally required value provided by the licensor to command a 25% royalty as a percentage of profits is provided in an excerpt by Cole:^[26]

^[24] See note 14.

^[25] Ibid.

^[26] See note 18.

“As Goldscheider states in The negotiations of royalties and other sources of incomes from licensing” (IDEA: The Journal of Law and Technology 36(1) (1995), a baseline allocation of 25% assumes the licensor is offering a strong technology bundle that includes:

• Relevant, assumable, and enforceable patents

• Trade secrets and know-how that are related to the specific technology, including marketing insights and contacts

• One or more established product trademarks or logos that could contribute credibility and goodwill to the licensee

• Software programs, advertising ...