Design Royalties
Design Royalties
(OP)
I recently started (another?) company with two other self-employed engineers, this new company was born of an opportunity that presented itself to me.
Basically we will be providing an OEM with a completed machine design (electrical, mechanical, software). We will not be manufacturing or building anything, solely responsible for the engineering efforts.
Now we are still up in the air on how to get paid from this design. I feel we would best benefit from a royalty percentage of each machine sold, but literally have no clue what the percentage would be, or what the industry standard would be to start negotiations.
Currently we are working on a hand-shake (its a long-standing relationship with the OEM), but we need to discuss the compensation fairly soon, so I'm just looking to pick some brains of those who know more than myself...
Basically we will be providing an OEM with a completed machine design (electrical, mechanical, software). We will not be manufacturing or building anything, solely responsible for the engineering efforts.
Now we are still up in the air on how to get paid from this design. I feel we would best benefit from a royalty percentage of each machine sold, but literally have no clue what the percentage would be, or what the industry standard would be to start negotiations.
Currently we are working on a hand-shake (its a long-standing relationship with the OEM), but we need to discuss the compensation fairly soon, so I'm just looking to pick some brains of those who know more than myself...





RE: Design Royalties
It's the stampede of experienced folks rushing to tell you:
You should be talking to an Intellectual Property Attorney.
A "handshake?" Good luck with that. One hopes the damage isn't already done.
TygerDawg
Blue Technik LLC
Virtuoso Robotics Engineering
www.bluetechnik.com
RE: Design Royalties
The opportunity is the handshake. No IP is moved until we finalize this aspect.
RE: Design Royalties
- What will be your liability? Do you have insurance? Getting insurance for product liability is a whole crazy world. If you have an "interest" in the product aka a royalty , it complicates insurance. There is wisdom in working on a lump sum or hourly basis for this reason.
- What scale of production run are we talking about?
- Is there an ongoing service portion to the deal?
- An industrial design client of mine designs bus stops for a manufacturer and charges in the neighborhood of 4% of the manufactured sale price. I think the lifetime sale price of these things is in the range of $20MM.
- There is variability in percentage royalties ranging across several orders of magnitude, so "it depends".
- Are you just selling generic technical service your client could get anywhere, or is there something about your design which is hard to replicate? Branding is a big deal in the product world. Patents and proprietary technologies factor in, as do difficult to replace technical skills. If your client can sell this widget for 20% more because they can market it is "design by sleepworks", your can happily charge 10%.
- Frequently designers ask for an upfront payment as well as royalties.
RE: Design Royalties
That's how Bill Gates made his first couple a billion, licensing DOS to IBM for something like $25 a copy. IBM thought they were getting a steal since they could only contemplate selling at most, a few thousand PC's.
John R. Baker, P.E.
Product 'Evangelist'
Product Engineering Software
Siemens PLM Software Inc.
Digital Factory
Cypress, CA
Siemens PLM:
UG/NX Museum:
To an Engineer, the glass is twice as big as it needs to be.
RE: Design Royalties
2. How easy will it be to keep track of royalties etc. to make sure you get what's owed you? How do you address this in the contract?
What is Engineering anyway: FAQ1088-1484: In layman terms, what is "engineering"?
RE: Design Royalties
- > I think you need quite a bit of business muscle to actually make use of a royalty deal.
RE: Design Royalties
Without IP protection (patent and/or copyright), I don't know how the arrangement you describe has much protection for you. It sounds like you are foregoing current payment in lieu of future participation (much like a movie star might do). I would certainly be talking to a lawyer about formalizing the hand shake agreement.
As to hand shake agreements, I am a big fan of them. When I was working for a major Oil & Gas company I did all my contracting on handshakes. The contractors knew that I would stand behind my word and were fine with it. I always did what I said I would do and my contractors always got paid on time. Then I retired. My replacement did not value personal relationships and screwed over some (all eventually) of my contractors. She works with contracts. Period. One of the tasks I frequently did was move wellsite compressors from one well to another. My average cost for 354 moves was $5,600/compressor. With my replacement's contracting strategy her average cost is $250,000 for the same machines in the same service. The only way it works is if both sides have a personal commitment to integrity and keep their promises within their delegation of authority (e.g., if your DOA is $50k then promising to pay for something that costs $75k is outside your DOA and you need someone else's permission to pay the bill and they may withhold the permission).
As to percentage, I'd try to estimate total annual market (is it dozens of units or thousands?), total sales price, and come up with a percentage that recovered my forgone payment in the first year. Then subsequent years are payment for the risk.
David Simpson, PE
MuleShoe Engineering
In questions of science, the authority of a thousand is not worth the humble reasoning of a single individual. Galileo Galilei, Italian Physicist
RE: Design Royalties
But what if you are doing a one off thing, say a project in a foreign city where there is no relationship? A good answer is you trust their attitude. You trust that they care about the same things as you. They have some love for their craft outside of it just making money. You also trust their culture, intelligence, integrity, and creativity. Actually when it gets down to what really matters, all the non-documented stuff is more important than the drawings and contract, and it even goes into reverse when you are dealing with a contractor who only cares about legalities. They will screw you if its legal, plus you add in a bunch of overhead for having to work through all the contract stuff. You have the kind of project where the contract negotiation takes longer than the construction.
RE: Design Royalties
The MBA 3-bids-and-a-buy nonsense leaves you with no room for goodwill (on either side) and low bidders are too often bottom feeders who will sign any contract with never an intention of following it. I got a 65 page master service agreement from one of the Oil & Gas majors once. I read it, sent them a bill for 2 hours of my time and refused to sign it. When the guy that wanted me to work for him called I told him that no one that he wanted working for him would sign the I-win-you-bleed contract, and anyone willing to sign it would be someone who would adhere to it. I got a 3 page contract (basically an NDA) the next day and worked for them for 4 years before he moved on and his replacement set me the 65 page contract to renew. Haven't worked for them since.
David Simpson, PE
MuleShoe Engineering
In questions of science, the authority of a thousand is not worth the humble reasoning of a single individual. Galileo Galilei, Italian Physicist
RE: Design Royalties
David Simpson, PE
MuleShoe Engineering
In questions of science, the authority of a thousand is not worth the humble reasoning of a single individual. Galileo Galilei, Italian Physicist
RE: Design Royalties
Trustworthy people never say "trust me".
RE: Design Royalties
TheTick: What does a third party audit look like? Who does it? Is it an accounting firm?
RE: Design Royalties
David Simpson, PE
MuleShoe Engineering
In questions of science, the authority of a thousand is not worth the humble reasoning of a single individual. Galileo Galilei, Italian Physicist
RE: Design Royalties
RE: Design Royalties
Customers cheat. It's what they do. They tell you the machine never worked; all the while they're pumping product onto store shelves.
RE: Design Royalties
I have reached a point (I was probably always there, but I've finally realized it) that there are not a lot of people who are interested in doing what I do so I am not powerless. I just replied to the latest travesty with "the contract is unacceptable, fix it or don't send it back to me, you need me way more than I need you". Problem is that the Supply Chain Management Contract Specialist doesn't need me at all. The engineers that don't have a clue how to fix their screw up know that they aren't going to fix it on their own without starting over from scratch. We'll see if the actual user has any stroke over the pissant contract guy.
David Simpson, PE
MuleShoe Engineering
In questions of science, the authority of a thousand is not worth the humble reasoning of a single individual. Galileo Galilei, Italian Physicist
RE: Design Royalties
I want to get to this: you all have to sign my short tightly focused agreement, and we are not signing your long rambly agreement because mine is better for everyone. If your lawyer can't handle my very practical and easy to understand document, get a new lawyer.