The Idea Premium

Posted by on Nov 30, 2012 in Blog | 1 comment

It is quite common for founders who originated the idea to fret over their ability to “get a little extra” for coming up with the idea for the business. Without the idea that people can rally around it’s hard to inspire people to action. In the book I don’t provide pie for ideas unless they are “baked”. A baked idea has some work behind it and sometimes some real expenses. In these cases the person who brings the intellectual property can get a little extra when you account for the theoretical value of the idea and the associated time and money.

However, there is another way to reward a founder for business-enabling ideas (as opposed to business-facilitating ideas like marketing tactics, for instance). That way is royalties. In some cases it is fair to reward a completely novel, non-obvious idea with a royalty payment based on a percent of sales. The royalty can be paid in cash or in pie according to the royalty calculation (2x).

I do not support the distribution of chunks of equity without a clear basis for the calculation; however, a royalty payment can be calculated quite easily and, therefore, will fit into the Grunt Fund model.

As a rule, you can be comfortable with royalties in the following percentages:

  • A copyrighted work would earn 2% – 10% (book, music, art, toys) no higher than 20% for famous people
  • Trade secrets might earn 2%-10% (manufacturing process, highly unique business concepts)
  • Software would be 5%-10%
  • Inventions (mechanical, machines, plants) 2.5% to 10% up to 20% with a strong patent
  • Drugs and medical devices 1% – 2% for an issued patent, proven products could receive up to 7% – 10%

I would err on the lower side when making royalty arrangements with founders or other employees the royalty shouldn’t burden the business and royalty recipient should probably not receive commissions for sales in addition to their royalty. They should take whichever is higher.

  • Kristi

    This is super helpful perspective!

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