An EULA specifies the terms under which end users may access and use software products. This playbook guides counsel through critical clauses on license scope, restrictions, warranties, and limitations of liability.
Why This Matters: Disputes over payments are common and can threaten the contract’s viability, making precise royalty and audit provisions critical.
Negotiation strategy
If you're the Licensor:
Ensure that royalty rates are competitive and reflect the value of the licensed technology. Include clear audit rights to verify the accuracy of payments.
If you're the Licensee:
Negotiate for flexible payment schedules that align with cash flow. Limit audit frequency to reduce administrative burden.
Essential elements
1
Royalty Rates
Percentage of net sales.
2
Payment Schedule
Quarterly payments with statements.
3
Audit Rights
Annual audits with notice.
Action framework
ACCEPT
Propose edits if royalty rates or payment terms are unclear or unfavorable.
EDIT
Reject clauses that allow excessive audit frequency or lack clear payment terms.
ADD
Add clauses for verification mechanisms if not present.
PRO TIP
Always ensure that the payment terms are aligned with the business's cash flow and financial planning.
Example clauses
FAVORABLE
Clear Royalty Rate Clause
"The royalty rate shall be calculated as a percentage of the net sales of the licensed products."
NEUTRAL
Standard Payment Terms
"Payments of royalties shall be made on a quarterly basis, within thirty (30) days following the end of each calendar quarter."
UNFAVORABLE
Ambiguous Audit Rights
"The licensor may audit the licensee's records at any time without notice."
Fallbacks
High-Value Contracts
In high-value contracts, ensure that financial terms are robust and include additional verification mechanisms to protect against underpayment.
Start-Up Licensee
For start-ups, consider more lenient payment schedules to accommodate cash flow constraints while maintaining audit rights.
International Agreements
In international agreements, account for currency fluctuations and include terms for currency conversion and payment adjustments.
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