From: coulman@cs.Usask.CA (Randy Coulman)
Newsgroups: misc.jobs.contract
Subject: Re: software royalties
Date: 12 Aug 92 16:30:41 GMT
Reply-To: coulman@cs.Usask.CA
Organization: University of Saskatchewan

In article <1992Aug12.124658.2595@acts.uucp>, larry@acts.uucp (Larry Palmer) writes:
>

I don't have any experience in the area, but I've thought about it a
bit, and done some reading.  In other words, take the following with
a grain of salt.

>Lately I've been looking at a couple of jobs where it seems a royalty
>agreement might be more appropriate than a fixed consulting fee
>(client doesn't have a lot of cash right now, wants a very
>self-contained general-purpose piece of software written, might sell a
>zillion boxes using it).
>
>Does anyone have any experience with how such agreements are
>structured?"  My questions would be:
>
>1) What's a typical rate?  Is it a fixed price per unit sold,
>   percentage of gross, percentage of net?  Any or all of the above?
>

From what I've read, it would be best to get a fixed price per unit
sold.  This is so that you are protected against the company using
the item in special promotions or as a loss-leader or something.
Say the item is a $200 software package.  If you have negotiated a
$100/package royalty agreement, you get $100 for every package sold
even if the company decides to sell the software for $50 to everyone
who buys a computer from them.   If you are on a percentage basis,
you're out of luck.  As for a typical rate, it depends.  If you are
sharing some of the marketing responsibility with your client, you 
should be entitled to more money.  If you are providing customer 
support for the users of the package, you should get more money.  If,
however, you just do the development and turn it over to the client,
then you shouldn't get quite so much.

>2) Is it typical that the rate would increase/decrease with time
>   and/or units sold? 
>

This would also depend on your responsibilities after you have 
written the software.  If you are supporting it, the more copies
sold, the more customers you have to support.  If you just write
it and hand it over, a fixed rate or possibly a slightly 
decreasing rate may be in order.

>3) Would it unusual to agree on a small fixed price up front, in
>   addition to royalties?
>

I would recommend this.  Unless you or the client has done some
market research that shows that your software will sell for sure,
you should be compensated for at least some of your time.  It 
really depends on how much risk you are willing to assume.  If 
you do not accept any fixed rate, you are taking a big risk.

>4) How is verification done?  Does the company automatically provide a
>   yearly statement of units sold, open its "books", or what?  It
>   seems that this could cause awkwardness, even in the best of
>   business relationships.  And doesn't revealing units sold give away
>   valuable competitve info?
>

I'm not sure about this.  I would imagine that there is some sort
of legal standard for this.  Check with your lawyer.

>5) Anyone have any good or bad personal experience with such
>   arrangements? 
>

None of either type.

>Thanks in advance...
>

The basic thing to remember is that you want to negotiate an 
agreement that is as mutually beneficial as possible.  A lot
depends on the amount of risk you want to take.  I absolutely
recommend getting a lawyer to look over the contract before 
you sign it.  If you don't feel comfortable even negotiating 
the contract, you should get your lawyer to do it for you.

Hope this sheds some light.  If I'm totally out to lunch, 
let me know.

Randy
-- 
Randy A. Coulman                |       ARIES Laboratory
                                |       Department of Computational Science
coulman@cs.Usask.ca             |       University of Saskatchewan
                                |       Saskatoon, SK   S7N 0W0             
Newsgroups: misc.jobs.contract