Spector Creative Presents: Ask a Toy Lawyer, David Schnider.
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Video Transcript: Ask a Toy Lawyer: How to Get a License Agreement
Picture a group of collectors, sitting around having a session, and dreaming of the collectibles they’d like to see. “Hey man, what if Calibre Wings did a line of GI Joe planes?” Or, “Dude, what if Alex Ross did Top Gun artwork?” Or, “Wouldn’t it be cool if Funko did a line of…” well, actually, there can’t be anything left that Funko hasn’t done, can there?
While dreaming of this “what if” alternate universe of collectibles is fun, it doesn’t really reflect the reality of the business. I love Star Trek starships. I have a beautiful collection of Eaglemoss ships on display in my office. But I’ve worked with the licensing managers at Paramount and not all of them share that passion. Even if they do, they certainly weren’t hired based on it. Especially at big studios, but even at smaller licensors, licensing managers are hired mostly based on their ability to sell and manage licenses. Their performance reviews and bonuses are typically based on the revenue they generate, not on how much they love the properties they are managing. And in many cases, a single licensing manager will be responsible for multiple properties. A single group at Paramount might handle licensing for Star Trek, Clueless, Top Gun, and a few dozen other properties. They can’t love them all.
Merchandise licensing can be a great way to connect with fans and extend the power of a brand. When Sideshow released The Child life size statue it was hugely popular, expanding the fan base for The Mandalorian and generating royalties for Disney. Pokémon has managed to keep products on toy aisles for years, sustaining multiple generations of fans. Somehow the Transformers that filled the store shelves during my childhood are back on the shelves at Target even today. That’s the kind of success that content owners are looking for when they grant a license.
But they also have to keep in mind the risk. A bad license can undermine or damage a brand. Sort of like doctors, the first rule for a licensing manager is do no harm. Back in the early 2000s, Mattel released a line of Thomas the Train toys that had unsafe levels of lead and were poisoning kids. That incident resulted in federal legislation, the Consumer Product Safety Improvement Act, that established federal safety standards for all children’s toys. That’s not the kind of publicity a licensor wants associated with their brand.
Earlier in my career, I was in house counsel at Leg Avenue, a sexy costume company, where I started their licensed costume business. Ultimately, we were able to secure a license to produce “sassy” adult Disney costumes. I still recall going back and forth with Disney on costume designs. Every costume we designed, Disney wanted a higher neckline and a lower hemline — except Tinkerbell, who they had to concede was just drawn that way. Shortly after the costumes went on the market, a tiny customer of ours issued a press release saying they had the “sexy” Disney costumes in stock. That resulted in an emergency meeting for me with the Vice President of Licensing at Disney, who claimed that this had gotten Bob Iger’s attention. Disney did not renew that license, likely because being associated with anything “sexy” was not consistent with Disney’s family friendly branding.
The starting point for any licensing manager is finding licensed products that are consistent with the brand and won’t tarnish it. But it’s not just about the product, it’s also about finding the right partners.
What Licensors Want
Licensors are looking for licensees they can trust to bring products to market that are safe, high quality, on brand, and likely to generate revenue. Remember, licensing exists in the first place so that content owners can extend into new products. Owners license their content either because they don’t have the ability to make and sell the licensed products themselves or because they prefer not to take the risk. Licensing only makes sense for a licensor if they partner with a licensee who has experience and is willing and able to take the risk of producing and selling the licensed products. A partner with an idea and no ability to execute is no better than the licensor itself.
While licensors may well be interested in cool projects based on their properties, they are going to take a close look at the licensees they are working with and the potential revenue that might be generated. A licensor isn’t looking for a fan with an idea. They want to work with partners who have a track record creating and selling the products being licensed. They want to see a management team that can successfully bring quality licensed products to market and, ideally, that can generate sales for those products. For example, if a company has successfully sold $100,000 worth of generic t-shirts on Amazon, chances are that company can achieve even greater sales by adding Batman or Iron Man to those shirts. By contrast, a company that has never sold apparel but has an idea for a unique shirt is much higher risk because they have not proven that they can bring the product to market or fulfill orders. An untested licensee also has no track record against which to project possible sales. It’s all speculation.
Although licensing is often as much about marketing and brand promotion as it is about sales, most of the time licensors are also looking to make money. Licensees are typically required by contract to guarantee that they will pay the licensor a minimum amount of royalties, called a minimum guaranty. Often, licensees pay part of that money up front as an advance before they sell a single product. Some licensors won’t even consider a proposal below a certain threshold. The NFL has a minimum royalty guaranty of $100,000. Keep in mind that the royalties are only a percentage of sales, so a minimum that high means unless you can guaranty sales of at least $1M of products, the NFL doesn’t even want to talk to you. In addition to partners who can bring a good product to market, Licensors are looking for deals that will generate revenue and help with their bottom line.
How to get a License
So, let’s say you’ve got a great product idea and you want to get a license to make it, how do you do it? You’re going to have to figure out who handles the licensing for the property you’re interested in. Most big studios have in-house licensing departments. Smaller content owners might work with a licensing agent. Sometimes you can find contact information online, but it’s generally better if you can work with someone who has a connection. If you don’t have any existing licensing connections, consider hiring a licensing agent to help you connect with licensors and develop your pitch. Licensing agents typically charge monthly fees and a percentage of revenue, but if you are new to the licensing world they are worth the cost.
Most licensing relationships start with a proposal. The potential licensee will put together a presentation, or deck, explaining what they have in mind. The proposal should briefly introduce the licensee, including its history, the key managers, and their key product or licensing experience. It should clearly identify the categories of products the licensee seeks to develop. It should include sales projections showing how much licensed product the licensee believes it will be able to sell each year. And it should provide the key deal terms the licensee proposes, such as the length of the license, the territory, any advance or guaranty, and the royalty rate.
It is important to understand that the scope of the license limits the products you can create. If you get a license to make Ghostbusters bobbleheads, you can’t then use your Bill Murray head to make a Caddyshack bobblehead. Similarly, you can’t use that same license to make Ghostbusters action figures. And if you license rights solely for the United States, you can’t sell any of those products in Europe. You need to ask for and license every product category you want to produce for every territory in which you want to sell and that should all be covered in your proposal. But be careful not to overshoot the mark. The more products and territories you add, the higher the guarantees and advance payments the licensor will want from you. Only ask for what you are ready to pay for.
Be cautious about the projections you give the licensor in your proposal. Licensees often think that if they want to get the license, they need to impress the licensor with astounding sales projections that show tremendous revenue. The problem is that the licensor is going to hold the licensee to those projections and ask for advances and guaranties based on them. One of the worst mistakes a licensee can make is over promising and under delivering. The licensee will end up overpaying for the license and losing money and the licensor will be disappointed when the royalties don’t reach the level they had projected. The best projections are reasonably based on sales of similar licensed products. Or, if you are new to licensing, you can base it on your sales of unlicensed products of a similar type, adding in an increase for the expected boost the license will give you.
If the pitch goes well, the licensor will negotiate the terms of the relationship until the parties have agreed on all the details. Be prepared to wait a while for the contract and any revisions. Lawyers are not known for their great speed. And it’s a good idea to have a lawyer of your own who has licensing experience review the contract. If you’re dealing with a large company the standard terms of the license may not be very negotiable. But licensing agreements can be full of all kinds of traps or pitfalls for the unwary. An experienced lawyer will be able to walk you through areas of concern and help you change some provisions and prepare for others. Be aware that licensors have a right to audit you years into the relationship (and some, like Disney, do it regularly). If your ducks aren’t in a row, you may end up paying audit fees and penalties down the road that can make you wonder why you entered into the license in the first place. This is a situation where an ounce of prevention truly can be a pound of cure.
What if You’re New to the Business
What if you have a great licensing idea but no experience selling the actual product? Find a company that does have experience with the product and work with them on a licensing proposal. Just be prepared for it to be primarily a passion project and not your retirement plan. Your partner is going to do most of the work and your idea is only going to have limited value to them. Hopefully your knowledge of and passion for the brand will make you a valued member of the team.
If you can’t find a partner, consider getting into the business yourself. It takes time, effort, and resources, but you can start by selling non-licensed products and developing a manufacturing and sales pipeline. If you can successfully establish a business in non-licensed products, you are going to be a much more attractive potential partner for a licensor.
If you have resources, but lack business experience, consider bringing on a team of experienced professionals. There are people out there who have worked for companies sourcing products, developing sales channels, and licensing in brands who can help you. If you can attract managers who have experience with licensed products, you may be able to attract a licensor based on your management team, without first having to build a track record selling non-licensed merchandise. Also, consider working with a company like Scot Neitlich’s Spector Creative, who can help develop products and bring them to market on a consulting basis, without the cost of hiring on full time staff.
Conclusion
However you go about it, if you want to get into licensed products or services, remember that while it can and should be a passion for you, it is still fundamentally a business. Licensors want to enter partnerships that build their brands and don’t hurt them. They want partners who they can rely on to produce and sell quality products. And ultimately licensors want to make money. So if you want the chance to build your dream product with someone else’s brand, you need to convince them that you are a partner who can deliver value. Whether that’s by track record, by team, or by plus five wand of charisma, the key to becoming a licensee is demonstrating up front that you will be a reliable one.