License Agreements for Small Businesses

A license gives you the right to use someone else’s assets. A License Agreement spells out the precise terms of those rights and the corresponding obligations.

The party that gives someone the use of a right or license is the licensor, and the party that receives the use of that asset is the licensee.

A common example of a License Agreement concerns the use of software. When you buy a software product, you only buy the right to use the software in limited ways — you don’t buy “ownership” of the software. The License Agreement that comes along with the software sets forth these limits. Some other typical License Agreements include Trade Name License, Patent License, Software License, and Copyright License.

If you are negotiating to obtain a license or if you find yourself in the situation of providing a license to someone else, the License Agreement can address the following key points:

  • Exclusivity/Nonexclusively: The license can be exclusive or nonexclusive. Licensors typically resist giving exclusive licenses. If the license grants exclusivity, over what areas is the license exclusive? If the license is exclusive, under what circumstances does the license convert to a nonexclusive one?
  • Term: The License Agreement needs to spell out the length of the license, plus any renewal rights.
  • Payment: The License Agreement needs to clearly state any upfront payments and any periodic payments required to maintain the license. A particular use of the license may also require an increase in payments. (For example, Software Licenses often require greater payment as the number of users increases.) Nonmonetary payments may also apply.
  • Restrictions on use of the license: Licensors often place a number of restrictions on use of the license, such as in certain geographic areas, or for designated purposes. (For example, a trade name licensor may grant the right to use a name, but only in a certain city.)
  • Infringement: The licensee may desire a statement that the licensor actually owns the licensed item and it does not infringe on the rights of third parties. Licensors will resist giving such statements.
  • Indemnification: The licensee might want a clause stating that the licensor indemnifies and holds it harmless with respect to any claim arising from the use of the asset that licensor did not have the right to license.
  • Termination: The licensor typically defines various circumstances that allow him or her to terminate the License Agreement early, especially if the licensee breaches the License Agreement.
  • Assignment and sublicense: Depending on the agreement, the licensee may be able to assign or sublicense the license. An assignment typically means a transfer of all of your rights in the license, whereas a sublicense involves giving someone the right to use a portion of your rights in the license. Most License Agreements prohibit assignment or sublicensing without the licensor’s approval. Licensees may want to negotiate for broader rights if their business necessitates sublicensing the product.