Alan Leal
Hewlett-Packard Company, Enterprise Business, Technology Licensing Roseville, CA USA

Prior discussions of the treatment of royalty compensation among technology license arrangements typically address valuation methods or fixed methodologies to determine how much is paid for a given technology type or category. This article addresses the more critical aspect of how such royalties are structured under varying scenarios, with emphasis on the associated market risk inherent in the various technology royalty models presented below. The author’s focus is to distinguish the most prevalent royalty models encountered in today’s high-tech industry, addressing the actual allocation of risk versus return between licensor and licensee.

This article covers the basis and strategy of the most prevalent technology royalty models applied across a typical technology product life cycle – from “growth,” to “saturation,” to final “decline” phase. As such, actual valuation or pricing of various products or technology (i.e., how much) is outside the scope of this article.

For purposes of discussion, this article centers on risk and return of various royalty models from the licensee’s perspective, typical organizations seeking to productize the licensed technology and enter commerce.