Should you work out an agreement before making a contract?

| Jan 23, 2021 | Intellectual Property |

If you want to partner with another company to license your intellectual property, you should consider working out an initial agreement first before negotiating your final contract. It may seem odd that you should make an agreement with your potential licensee in advance of starting on your contract, but it may be critical to your success. 

As Inc.com explains, it is actually standard practice for parties to agree to basic terms before negotiating a contract, usually through a term sheet. There are some important reasons why this is the case. 

Making sure you share a perspective

Creating a term sheet helps you figure out whether your potential licensee actually shares your perspective on your working relationship. You can go over matters like the royalty rate the licensee wants, the territories the licensee wants the right to license your IP in, and how long your licensee wants the agreement to last. 

Working out these big picture items creates an outline for your future contract negotiations. It may also help you decide whether your potential licensee will be a good fit for your goals. If you forego agreeing to basic terms and later discover that you and your negotiating partner do not see eye to eye on major issues, composing a contract will become a fruitless endeavor. 

Be careful about contentious issues

As you compose an initial outline for negotiating a contract, consider staying away from contentious issues. Do not count on solving difficult matters before working on your contract. If you put your potential licensee on the spot with a hard question to solve, the licensee may pull out of the deal. It should be fine to at least broach important issues while working out a term sheet, just not ones that may cause a negotiation to fall apart. 

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