Millions from the Mind

Sample Heads of Agreement (with hints)

The text below can be selected and copied into any program which will let you edit and format it. The text includes hints for negotiating a license agreement. Select HeadsOfAgmt.htm for text that is pre-formatted with license negotiation hints. Select HeadsWO.htm for the form without hints.

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An Example of "Heads of Agreement."

Please note: everything in Italics is for guidance only; everything else is actual typical language. While this type of outline of terms covers the key points of the business negotiation, each case is different and the "Heads of Agreement" should tackle all the major issues that you can anticipate. In addition, there are numerous points such as the right to inspect records, how disagreements are to be settled, how trade secrets are to be protected and other points that are not simply "boilerplate"; experienced legal counsel is indispensable.

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1. Licensor: Your name or company name

Address

City, State, Zip Code

2. Licensee: Customer's name

Address

City, State, Zip Code

3. What is Licensed: Description of the product or technology or application of invention. If you want to limit the scope of the license, here is the place to start. For example, you can limit the product by weight, by size, by composition, etc.

4. Proprietary Rights: List patent numbers and patent applications with dates, country by country. Describe generally the "Know How" package.

5. Support: What you will provide in addition to the proprietary rights. Examples: Samples, ingredients, equipment, anything up to a turn key operation.

6. The Grant: A ______________* license to make, have made, use and sell the Product in the Territory under the Patent Rights.

Also, a _____________* license to make, have made, use and sell the Product under the Know How.

*Fill in: exclusive or non-exclusive or semi-exclusive or sole. Note that Patent Rights need defining, e.g. to include continuations-in-part, divisions, improvements. If you are licensing know-how, do so with a separate grant clause. If you are licensing a trademark or other rights, do so with a separate agreement.

7. Option Period: State period of time, exclusive or non-exclusive, information and/or services to be supplied. Also option extensions, if any.

8. Option Price: State amount to be paid at signing or otherwise. Also, amount creditable against license payment or future royalties.

9. License Payment: State sum to be paid upon exercise of option or at signing if no option exists. State whether any or all of such sum is creditable against future royalties or otherwise refundable and on what basis.

10. Royalty Rate: Specify percent of Net Sales and periodicity of reporting and payments. Provide details if royalty rate changes by volume, by year, or other circumstances. Consider dividing royalty between patent rights and Know How so that the agreement continues if the patent should be lost.

11. Territory: State the geography.

12. Term of License: Concurrent with the life of the last-to-expire patent or a period of ten (10) years if no patent rights shall exist.

While the foregoing is a good example, this is always a negotiable item.

13. Minimum Royalties:

An annual minimum royalty, payable in quarterly installments shall be based upon approximately one-half of mutually agreed anticipated Net Sales.

Minimum payments are 100% negotiable. The purpose is to assure the licensee's full attention to maximizing the technology without being so punitive as to kill the deal. In most instances, a substantial advance royalty or minimum guaranteed annual royalty will serve to help assure licensee performance.

14. Term of Agreement:

The Agreement may be terminated by either party by reason of an uncured breach upon sixty (60) days notice. The Agreement may be terminated by the Licensee during the first five (5) years of the Agreement upon ninety (90) days notice by paying to the Licensor the remaining minimums for the said first five (5) years of the Agreement. After said first (5) years, Licensee may terminate the Agreement at any time without penalty upon ninety (90) days notice.

The foregoing is one way to help assure a licensee's best efforts at the outset. Always a negotiable area. As a guideline, consider termination with a single payment equal to the minimums for the succeeding five years or so of the agreement. Be sure to provide for disposition of unsold inventory.

15. Patent Filings and Maintenance:

Licensor shall be responsible for all patent filings, for prosecution and maintenance of patents and for all costs relating to same.

Keep control of your own patent work. If you need financial help, ask the licensee to reimburse you for any filings made at his behest, e.g., foreign filings.

16. Improvements: Best case - include without cost all improvements made by the licensor and get back a non-exclusive right to use and license outside of the territory any improvements made by the licensee.

17. Indemnification: Licensee shall hold licensor harmless from any and all product liability claims caused by manufacture and/or sale of the Products by Licensee, excepting for direct negligence on the part of the Licensor.

Licensee has insurance, Licensor doesn't and can't afford it. This is a "must."

18. Infringement: Licensee shall have the first right to bring appropriate action against infringers at its own expense and shall retain any recovery therefrom. If Licensee shall fail to take action within ninety (90) days after learning of such infringement, then Licensor may institute appropriate action at its expense and retain any recovery therefrom.

There are an infinite number of ways to handle the issue of infringement. The above is reasonably balanced, but the situations vary widely. Issues include possible escrow of royalties, reimbursement of costs, etc. Best solution often is for Licensor and Licensee to simply agree to work in good faith to deal with any infringement situation.

IMPORTANT NOTE: THE FOREGOING OUTLINE OF TERMS IS PROVIDED FOR INFORMATION PURPOSES ONLY AND DOES NOT CONSTITUTE AN OPTION OR AN OFFER TO BUY OR SELL.

The above all-caps disclaimer protects your negotiating position until both sides have agreed to terms.

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