Art licensing can be a great, profitable, passive revenue stream in your business because you create something once and then pass off the responsibility to create the product, market it, sell it, and deal with the customers.

Basically with art licensing you create it and then get a payment for the privilege of someone else being able to use your creation in their business.

But it also can be a huge mistake if you sign the wrong art licensing agreements.

In fact, some art licensing deals:

• are rights grabs because they take more rights to use your work than they need
• will never pay you more than your advance because they don’t have the business set up to sell many products
• lock away your artwork for years but never get put on a product

Art licensing legal jargon

Art licensing agreements are also stuffed with legal jargon.

So below I’ve compiled 9 common legalese terms that crop up in an art licensing agreement and translated each of them for you.

License

Defined: When an intellectual property owner gives permission to someone else to use it.

Example: When you, the artist, give a company permission to use your illustration on a product line.

Licensee

Defined: The one who gets permission to use someone else’s intellectual property via a license.

Example: The company that you allow to make products using your illustrations.

Licensor

Defined: The one who gives permission to someone else to use intellectual property via a license.

Example: This one is you.

Exclusive license

Defined: When you agree that the licensor will be the only one who can use the intellectual property. This is often restricted by:

• the type of products or medium they can use the intellectual property on/in
• the areas of the world they can sell the resulting product in
• the length of time that the license lasts

Example: You grant a company a one-year U.S. license to use a specific illustration on iPhone cases.

Note: In the United States, an exclusive license must be in writing to be enforceable.

Royalty

Defined: A payment made to the licensor based on sales. Royalties are often paid either based on sales numbers or the number of units sold.

Example: If your license specified a 10% royalty rate against sales of $1,000, you would earn a $100 royalty. Or if your license specified a $0.50 per unit royalty and 100 units were sold; your royalty would be $50.

Sales basis

Defined: Royalties paid based on sales numbers are usually calculated on a gross or net sales basis.

Gross sales equal the amount paid by the end customer. While net sales are gross sales less deductions. Deductions might include:

• cost of goods
• taxes
• promotion costs
• fees
• shipping

Example: As before, if your license specified a 10% royalty rate against gross sales of $1,000, you would earn a $100 royalty.

But if you were paid a 10% royalty rate against net sales. You need to know both the gross and net sales. If the gross sales were $1,000, but the net sales were $600, you’d earn $60.

Note: What deductions are allowed is an important clause in your contract. You should make sure they are paying their business overhead costs and not passing them on to you. This is one of the most common sections where artists lose out on royalty revenue, which is why I break down exactly what to look for in this section in this workshop!

One-time license fee

Defined: A single payment made at the signing of the agreement. With this type of license, you are not paid a royalty.

Example: Rather than being paid on an ongoing basis as products are sold, this type of license gives you full payment up-front. For example, if you sign a license paying you a $1,000 one-time license fee, that’s all you’ll earn. Regardless of if they sell 50 units or 5,000 units.

Advance

Defined: An upfront payment of royalties given at the signing of the agreement. Royalty payments will be withheld until earned royalties exceed the advance.

Example: You sign a license agreement giving you a 10% royalty rate against gross sales with a $2,000 advance. The company is required to report sales to you on a quarterly basis.

• Quarter 1: Gross sales are $500. Your royalty is $50. This is deducted from your advance, so you still need to earn $1950 before being paid.
• Quarter 2: Gross sales are $3,000. Your royalty is $300. Now you are down to $1650.
• Quarter 3: Gross sales are $10,000. Your royalty is $1,000. Now you only need $650.
• Quarter 4: Gross sales are $12,000. Your royalty is $1,200. You’ve now recouped your advance and will be issued a check for $550.

Note: This isn’t a typical example, it is very common for artists to take years to recoup an advance.

Guaranteed minimum

Defined: The minimum amount of royalties that you will be paid for any given period. These might be paid up-front (similar to an advance) or at the close of each period.

Example: You sign a license agreement giving you a 10% royalty rate against gross sales with a $2,000 guaranteed yearly minimum. The company is required to report sales to you on a quarterly basis.

• Quarter 1: Gross sales are $500. Your royalty is $50.
• Quarter 2: Gross sales are $3,000. Your royalty is $300.
• Quarter 3: Gross sales are $5,000. Your royalty is $500.
• Quarter 4: Gross sales are $7,000. Your royalty is $700. Because the minimum was not met, you’ll get an additional payment of $450.

Common Art Licensing Agreement Sections

There are a lot of sections that are common in art licensing agreements and I’ve broken them down below.

Who is involved?

So the first section that every single licensing agreement is going to include is who is involved. 

If you’re an LLC, you want to make sure that the contract is between your LLC and the other business. So that you are signing the licensing agreement on behalf of your LLC, not on your behalf. (This post breaks down the best (and worst) way to sign your LLC contracts.)

What is being licensed?

This next section should include very specific details so that it’s clear what you are (or aren’t) giving them permission to use.

• If it’s a single piece of artwork, this section should list the artwork title.
• If it’s a collection, this section should list the collection name and each of the included titles.
• If you submit designs on an ongoing basis, this section should outline how designs are submitted and rejected

What are they allowed to do with your artwork?

This is a very important section and a section that companies often use to take advantage of unsuspecting artists.

In this section, you want them to spell out the exact ways they are allowed to use your artwork.

For example, if they only sell tea towels, then you want this section to say tea towels, not kitchen linens.

This is also a section of the contract that’s heavily negotiated and you want to make sure you 100% understand before signing.

How long does the relationship last?

This section may or may not be in your contract depending on the kind of relationship you are creating.

If you are doing something that’s project-based, like licensing an illustration for a printed magazine, this section might not be included.

But if you are licensing your artwork for physical products, this section should absolutely be included.

The standard for physical products is a two- to three-year term that’s renewed on an annual basis automatically after that.

How can you exit the relationship?

If you are entering into a multi-year, royalty licensing agreement, you want to have the process for ending the agreement clearly outlined.

This could be because you don’t have a good personality fit or that it’s not profitable. But I’ve also ended licensing agreements because another one of my client’s licensing partners expanded into a specific product category and we wanted to reduce the number of partners she was working with.

Generally, there are two kinds of exit provisions (or in legalese termination clauses).

• “For cause” provisions are very common in licensing agreements and are used to end the relationship when one side is acting badly (usually not paying you royalties)
• “For any or no cause” provisions are less common in licensing agreements and are used to end the relationship for any reason.

The reason “for any or no cause” provisions are less common is that with product-based licensing agreements, they don’t want you to end the agreement when they still have a warehouse full of products to sell.

Instead, what you’ll be able to do is exit the agreement for any reason before the next renewal term.

How will you be paid?

This is another heavily negotiated section of an art licensing contract and should cover these things:

• How will you be paid? (i.e. flat rate, advance, royalty)
• Is there a “kill fee” if the project doesn’t move forward?
• If being paid a flat rate, when and how will you be paid?
• If being paid an advance, when and how will it be paid?
• If being paid a royalty what is the rate and how is it calculated?
• If being paid a royalty, will it be calculated on a gross or net basis?
• If being paid a royalty, how often will it be paid?

What documentation will you get with payments?

Each time you get paid, you should be getting statements or reports that show the sales numbers for the items your artwork is licensed on and any deductions that were made.

These statements are incredibly important so that you can see if one product (or product category) is making up the bulk of your royalty payments and to make sure that you are being paid fairly and correctly.

For example, if your statement says that nothing was sold in the past quarter, but you know that several of your friends bought items. Or the print run was 2000 calendars and it’s marked as “sold out”, but you were only paid for 1500.

How will you be credited?

When you are first starting, it’s important to get credit for your designs so that you can leverage them for additional licensing deals.

So your contract should spell out how they plan on offering you credit. Common places include:

• on the product itself
• on the product packaging
• on the advertising or promotional collateral
• as part of the social media marketing

Will they give you free/discounted products?

In non-print-on-demand physical product licensing deals, it is really common that they will give you free products. However, these free products usually come with restrictions. For example,  it is very common for the agreement to say that they are for your personal use or you can only use them to give away as gifts/prizes. And they restrict you from reselling them.

Some licensing deals will allow you to buy products for resale at a discounted price (usually similar to the wholesale price).

Common (and uncommon) sections to negotiate in an art licensing agreement

When I negotiate art licensing contracts for clients there are five sections that I commonly negotiate:

• Making sure there is a fair “for cause” termination provision.
• The section about what they can do with the license to make sure it’s not too broad and includes products they have no intention of producing.
• The royalty rate.
• What’s allowed to be deducted from gross sales when calculating the royalty.
• The credit line.

And then there are sections that I rarely negotiate:

• The initial term and renewals
• Frequency of payments
• Boilerplate (like warranties, indemnities, jurisdiction, and governing law)