4.2
Money terms: royalty rates, minimum guarantees (MG), and advances
Most licenses pay the rights holder in three connected ways: a royalty on each sale, a minimum guarantee (MG) the licensee commits to paying no matter what, and an advance paid up front against that guarantee. Understanding how these fit together is the key to knowing what a deal really costs you.
Key terms
- Royalty rate
The percentage of sales paid to the licensor.
- Minimum guarantee (MG)
The minimum total royalty you agree to pay over the license term, even if sales fall short.
- Advance
A payment made before sales begin, credited against future royalties.
- Recoupment
Earning back the advance or MG through royalties before you owe anything more.
- Shortfall
The gap you must pay if royalties earned are less than the MG.
How royalties work
A royalty is a percentage of an agreed sales figure (the royalty base, covered in 4.3). For consumer products, royalties commonly fall in a high-single-digit to mid-teens percentage of wholesale range. Rates vary by property popularity, product category, channel, and your track record. Premium or high-demand titles may command higher rates; low-margin categories may get lower ones. Media and publishing deals use different structures entirely.
How the MG and advance fit together
The MG protects the licensor. It says: "However your sales go, we will receive at least this amount." Licensors use it to confirm that you are serious and to protect their property from licensees who sign up but never sell.
The advance is usually a portion of the MG paid when you sign. The remaining MG may be paid in installments during the term. Advances and MG payments are generally credited against the royalties you earn, but they are typically non-refundable. If your royalties never reach the MG, you still pay the full MG.
Once your earned royalties exceed what you have already paid, you begin paying additional royalties, often called overages.
$0
- Royalties earned · 12%
- $0
- Minimum guarantee
- $30,000
- Moonfox pays
- $30,000
Royalties fall $30,000 short of the guarantee. You still pay the full $30,000 MG.
Cross-collateralization
If a deal covers several product categories or territories, check whether royalties are cross-collateralized, meaning sales in one category count toward the MG across all categories. Without it, a strong category cannot cover a weak one. This can make a big difference to your risk.
Example
These figures are illustrative only. Moonfox Apparel licenses Starlight Paladins for two years at a 12% royalty on wholesale sales, with an MG of $30,000 and an advance of $10,000 due on signing. The remaining $20,000 is due in two installments. In year one, Moonfox sells $150,000 at wholesale, earning $18,000 in royalties. In year two, it sells $120,000, earning $14,400. Total royalties earned: $32,400. Because this exceeds the $30,000 MG, Moonfox pays an additional $2,400 in overages. Had sales totaled only $200,000 (royalties of $24,000), Moonfox would still owe the full $30,000.
Common mistakes
- Treating the MG as a best-case target instead of a firm commitment you must pay.
- Assuming the advance is refundable if the product does not launch.
- Forgetting to check whether categories or territories are cross-collateralized.
- Comparing royalty rates without comparing the royalty base they apply to.