Collecting Royalties

[swertel]

I'm curious as to how people verify that the royalties they are collecting from private companies.

Take a hypothetical example.
A consulting engineer helps a start-up company with the design of a new whiz-bang product. As a start-up, they have little capital to spend for the design up front. The consultant and the company agree to a smaller initial fee, but then a percent royalty will be applied to each unit sold that will go to the consultant over the next X number of years.

How would the consultant be able to verify the number of units sold and the list price of each unit to the amount of royalties collected? Is it 'simple' contract language that forces the company to disclose this information to the consultant? Is it contract language that allows the consultant to audit the company periodically? Does a 3rd party need to get involved?

--Scott

http://wertel.eng.pro

 

[MikeHalloran]

I've been close enough to smell two royalty situations:

2. An outside inventor gave a demo to my then employer, but held back full disclosure of the math behind his patent until he and the VP could agree on the royalties. They never got as far as agreeing who would audit under which conditions; they couldn't agree on the amount.

1. A VP of Engineering of a large defense contractor collected a royalty for every custom ball valve that the contractor built, which is to say most of the ball valves they sold in their large custom product. It was not a particularly good valve design, and in fact had some serious shortcomings, which were ignored because it was the VP's design.



Mike Halloran
Pembroke Pines, FL, USA

 

[TheTick]

About the only certainty in a royalty deal is that you will get screwed. Make sure you build the verification means into the contract.

 

[Ron]

An audited financial statement...that way you have at least two entities to sue in the event that you are "wronged".