Royalties constitute payments made for the license to use an asset or property, such as a patent, copyright, natural resource or franchise.
Key Features:
- Typically calculated as a percentage of sales or number of units sold
- May involve lump-sum upfront fees in addition to running royalties
- Contracts specify royalty rate, payment terms and asset being licensed
Example:
An energy company secured exploration rights to an offshore oil field paying royalties on future extraction volumes to the government.
Takeaways:
Royalties are a primary monetization method for intellectual and natural resources, allowing owners to profit passively through utilization. Accurate accounting and payment processing are critical to compliance and maintaining licensed access. Royalty financing is an alternative IP-backed funding option.