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Software and Hardware Licensing Agreements
Licensing agreements can be tricky, and if you’re not careful, you may be giving away more than you bargained for. The typical licensing agreement discusses what is allowed to be done with the product, but it may not go into sufficient detail to maximize the product’s value. For example, does your standard license agreement take into consideration the number of cores, or just the number of users? Does your hardware use an embedded term license agreement, or do you simply sell the firmware with a perpetual license – thereby missing out on a potential future revenue stream?
At Terkanian Law, our vast experience in technology allows us to look at IP licensing agreements from a unique perspective. Our goal goes beyond protecting your product; we also act as your technology advisory team to offer suggestions on getting the most out of different licensing models.
What Are the Types of Licensing Agreements?
There are a variety licensing models available and, depending on your product, you even may want to incorporate multiple parts from different models.
Software Licensing Models:
While there are many software licensing models to explore, there are three that stand out as the most widely used among software vendors: the Term License, the Perpetual License, and the Consumption License.
The Term License works just like any subscription plan: a customer purchases the software for a set period of time, and when the license expires, they must negotiate with you to renew the license. As a software vendor, the benefits of a software term license can be enticing. First, although the product is sold at much lower up-front cost, a predictable revenue stream is created that will allow you to estimate revenues based on actual sales; not projections. Second, if your customers are happy with the software features, they may keep if for years to come… often spending more on the subscription than they would have if they purchased the software outright. Keep in mind, however, that customers will expect you to create and handle the installation of upgrades, bug fixes and supporting features.
The Perpetual License is created when a software vendor sells their product for a one-time set price, and allows the customer to use that version of the software into perpetuity. The vendor benefits by getting a large influx of cash for each sale of the software, while also building a customer base for future software upgrades.
The Consumption License pricing model is based on the number of users that will be using the software. For example, a tiered consumption license could offer a price of $100 per month for 1-20 users, and $175 per month for 21-40 users. Alternatively, the model could offer $5 per month per user for up to 20 users, then $3.50 per month per user from 21-40. The advantages to a software vendor here is that they will be paid for the exact number of users who utilize the software. Keep in mind, an alternative to user-based consumption is core-based consumption. Instead of paying by the user, the customer would pay by the number of computer cores accessing the software. This is a less-preferred software licensing model, but it is used by many large software vendors.
Another possibility is to combine software licensing models to fit your needs. For example, you may want to consider offering a term license that is also based on tiered consumption.
Hardware Licensing Models:
When done properly, a hardware license agreement can be considered an embedded software license agreement. The hardware itself is usually sold as a one-time purchase, whether through the manufacturer directly, or by way of a retailer. However, the software (or firmware) within the hardware produces an opportunity for different licensing models. For example, the hardware may contain over 100 features, but the software could limit those features based on software license purchased. Additionally, new features can be turned on by upgrading the software license for an additional fee. You need to take into consideration the lifetime of your hardware, then build a revenue plan based on your existing and expected customer base. If you need to attract new customers every year to stay profitable, you may want to consider a term license agreement, rather than a perpetual one.
How Do I License Technology?
Licensing agreements are just like any other contract. You create a set of rules that you are willing to allow a user to perform with the software (such as installation, updates, number of users, etc), then determine how much you will charge for the right to use the software within that rule-set. After finalizing the terms of the license, you draft the license agreement and include it with the sale of your technology. Keep in mind, there are a variety of ways of including the license agreement with the sale, such as signing a traditional contract, shrink-wrap agreements, and installation agreements.
Your goal is to maximize your company’s potential profits, while being able to address your customer’s needs at a cost comparable to market indicators. Therefore, your licensing model needs to account for these factors as well.
There are many opportunities to consider when planning your hardware and software licensing models, and an experience technology attorney can help you maximize your profits and protection. At Terkanian Law, we have our roots in technology, and our unique perspective and real-world technology experience allows us to better serve our clients when created their licensing agreements.
Give us a call today and we’ll be happy to talk about your software and hardware licensing agreement needs.