The High Court has rejected a landmark Sh1.1 billion arbitration award handed to software developer Samuel Wanjohi, the owner of Popote Innovations, citing the lack of an inked contract with Safaricom.
Last year, Popote Innovations received the huge award when an arbitrator determined that Safaricom had stolen his company's intellectual property to create the M-Pesa Super App and M-Pesa Business App.
The massive figure represents the ongoing worldwide transition to a knowledge-based and innovation-driven economy. Intellectual property has evolved into a critical and most significant asset for businesses today, serving as the cornerstone for market domination and long-term success.
As a
result, the growing relevance of intangible assets necessitates the
identification of additional income-generating channels through well-structured
agreements such as revenue sharing.
Revenue sharing is a financial partnership between the rights holder (licensor) and the party using the technology or product (licensee).
Rather than getting a lump sum payment, the rights holder receives a percentage of the income earned by the licensed product or technology, resulting in a continuing revenue stream that rises in tandem with the product's performance.
This model balances both parties' interests, enabling the licensee to boost sales while also allowing the licensor to profit from the technology's economic success.
A shared purpose is important to a revenue-sharing model: both the rights holder and the licensee have a vested interest in the product's success in the market.
This alignment may lead to a fruitful partnership in which both sides are encouraged to innovate, improve and broaden the product's reach. However, in order to realise this potential, the revenue-sharing model must be organised in such a way that risks and profits are equally distributed.
A well-designed revenue-sharing model takes into account each party's contribution and work. The licensee often assumes responsibility for production, marketing and distribution, which can be significant in cases when upfront expenses are large.
In exchange, the rights holder grants access to a valuable technology or product that can help the licensee expand. This interaction can become mutually beneficial if both sides are motivated to put up their best efforts.
Further, a revenue share can take a tiered structure whereby parties set payment rates that increase with higher sales.
This form of tiered structure drives the licensee to maximise sales, extend market reach and scale production, since they gain directly from rising revenues, while the rights holder also enjoys improved returns.
By linking incentives with revenue-sharing percentages that adjust to sales performance, all partners remain committed to realising the product's full potential.
Additionally, one of the most important considerations in developing a revenue-sharing model is determining the base revenue amount from which payments will be derived. Revenue-sharing agreements frequently calculate payments based on gross or net revenue.
Gross revenue is the entire income made by the licensed product before expenditures are subtracted, whereas net revenue includes permissible deductions, including manufacturing, distribution and marketing costs.
Each technique has advantages, and the best one is determined by parties’ individual industry, product and financial goals.
Gross revenue provides simplicity and openness since it is a basic computation based purely on sales data. This technique is frequently used in sectors with little overhead, when subtracting expenditures is unneeded or unnecessarily complicated.
In contrast, net revenue provides for a more balanced approach, especially in businesses where considerable costs are linked to product performance.
When utilising net revenue, the agreement must stipulate which expenses can be subtracted and how they should be documented. This degree of transparency is critical to avoiding misconceptions about permitted deductions and ensuring that payments appropriately represent the product's profitability.
That being stated, it is also necessary to establish the appropriate royalty rate. The royalty rate is the proportion of income shared with the rights holder, and setting it is a complex procedure that considers market potential, competitive positioning and financial risk.
Higher royalty rates are frequently connected with items that have a large market potential, but lower rates may apply when market risks or early expenditures are significant.
Crafting a fair rate necessitates an awareness of the product's life cycle, the amount of investment necessary and how the technology puts the licensee within their sector.
Auxiliary, trust and openness are essential components of a successful revenue-sharing arrangement. Licensees should be prepared to give periodic reports describing income collected, costs expended (if applicable), and any deductions applied, so that the rights holder may confirm that royalties are calculated correctly.
Regular, open reporting ensures that all parties have access to accurate financial data, therefore maintaining responsibility and avoiding any conflicts. Moreover, openness benefits the licensee by establishing expectations and creating a collaborative atmosphere in which both parties feel informed and appreciated.
Revenue-sharing models are more sophisticated than this article; they are mechanisms that determine the success and longevity of intellectual property licensing transactions. A well-balanced licence should favour both innovative incentives and business realities, allowing both licensors and licensees to reap the benefits of this cooperation.
With intellectual property serving as the new engine driving global commerce, mastering revenue economics has become a need, not a choice, in order to remain competitive.
The writer is a partner at Sisule & Associates LLP
