Learn How a Royalty Agreement Works

Standardized Legal Documents Learn How a Royalty Agreement Works

What Should You Know About Your Royalty Agreement?

Royalty agreements are a type of legal documents that people use across many industries.

If you have no clue what you should pay attention to when reviewing the terms of a royalty agreement, this article will answer all of your questions!

Use DoNotPay’s rich knowledge base to understand what kinds of legal documents exist and how to write contracts without the help of expensive lawyers!

What Are Royalties?

If you want to understand any royalty agreement, it’s crucial that you familiarize yourself with the term “royalty” and all that it can refer to.

Royalties are essentially payments an individual or a company receives from licensing their creations to another party. The party that obtains the right to use the assets or original creations of the company or individual needs to compensate them in the form of a royalty payment. These creations are called intellectual property.

The party that receives royalty payments is the licensor, while the party that uses the assets or creations of the licensor is called the licensee.

Royalty payments are usually a stable and large source of income for those that license out their property to another party.

Examples of Royalties Across Different Industries

The practice of selling one’s property is present in many industries. The most common example is the entertainment industry.

For example, musicians always sell the right to use their songs to third parties for their songs to be played in films, on radios, or on streaming services.

Here’s a table that presents different types of royalty payments across industries:




Performance royalties, such as songs and merchandise

Fashion and sport

Logos, names, and design


Book royalties that authors receive every time their work is sold—creators can also receive a royalty payment from the renditions of their characters if they sell the rights to another party to use them 


Franchise royalties that give the right to the licensee to open a branch under the name of the licensor  


Patent royalties



A Simple Definition of a Royalty Agreement

A royalty agreement is a legally binding contract between two parties—the licensor and the licensee. Also called a licensing agreement, the contract lists all the terms of royalty payments, the most important being:

  • Who receives royalty payments and who pays them
  • What the royalty rate and payment amount are
  • What the intellectual property use period is
  • Which location the property will be used in

When the licensor sells the use of their intellectual property, they give the licensee the right to reproduce, market, and sell their product in return for royalty payments.

A solid and all-encompassing royalty agreement details all the ways in which creators—whether individuals or companies—agree that their intellectual property can be used by the licensee. It’s crucial that both parties benefit from the agreement. The intellectual property owner gains:

  1. Steady and large income that may increase further as their product gains popularity
  2. A wide audience and market reach

The licensee mainly gains access to products they cannot use without the royalty agreement.

What To Include in Royalty Agreements

Including the names of the licensor and the licensee and the amount of royalty payment is only the starting point of drawing up a royalty agreement.

When entering into a licensing agreement, you need to:

  1. Establish the property rate, which is usually a percentage of the net and gross sale of the products
  2. Decide on the regularity of the royalty payment you will receive or pay
  3. Determine whether royalty payments will increase if the product sells in larger quantities than initially anticipated

If you are the intellectual property owner, you also have to decide with the other party whether you can sell the use of your property to another party during the period your licensing agreement is in effect.

Can You Use a Royalty Agreement Template?

You can take a look at many examples of royalty agreements by downloading contract templates from the web. When it comes down to it, though, it’s best to draw up your own agreement. Only then can you be sure that the contract you are signing includes all the sections you need.

When you sign up for a DoNotPay account, you can create all kinds of different legal documents from scratch. Our robot lawyer guides you through the making of your contract, and you only need to answer a few key questions about the document you want us to generate. In under a few minutes, you will have a fully personalized contract! 

How To Generate Documents With DoNotPay

Getting a tailor-made contract with the help of DoNotPay takes only three short steps. Here’s what you should do:

  1. Log in to your DoNotPay account using any web browser
  2. Search the document you need our app to generate
  3. Answer a few questions from our chatbot to get a personalized document

Our Legal Documents product is updated daily to include more contracts you need in your personal and professional life. Here are some of the legal documents DoNotPay generates most often:

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