How to Resell your Software

Bernie Amarillo, sports entrepreneur, believed he had done the biggest software deal of his lifetime when he sold his event simulation software ‘Hit Maker’ to Sakura, CEO of Japan’s largest sports event company – see video here.

Unfortunately, in signing Sakura’s standard contract Bernie granted her a worldwide exclusive software license in perpetuity (forever) that allowed her to redevelop and relabel the software and sub-license it for a one-off payment equivalent to 8,000 Euros. This basically meant that Sakura could do whatever she wanted with ‘Hit Maker’ e.g. change the name of the software, redevelop the software code and sell it to whoever she wanted throughout the world without Bernie receiving any more money!

So, where did it all go wrong for Bernie?

Well for a start he agreed to sign Sakura’s ‘standard’ software license during a world cup rugby match! ‘Standard’ license usually means a one-sided contract protecting the person who wrote it – here Sakura. Bernie should have had the contract reviewed and negotiated by his lawyer to make sure his interests were protected. A good lawyer would have highlighted the following points for Bernie.

First of all, what’s the purpose of the deal here?

Sakura wants to be able to resell or sublicense ‘Hit Maker’ to her customers in the sports events market. Sakura’s customers are mainly in Japan. So, mistake number one was Bernie granting a worldwide exclusive license. This means that only Sakura can sell ‘Hit Maker’ throughout the world i.e. no one else, including Bernie, can license the software to other customers.

Any form of ‘exclusivity’ deal should be considered carefully and if acceptable precisely defined. Sakura’s company was only ‘big’ in Japan so giving a worldwide license makes no sense as Sakura is unlikely to be able to sell it outside of Japan. So, exclusivity should have been limited to a Japan and only on the basis that Sakura sold enough copies of ‘Hit Maker’ to make it worthwhile for Bernie. Exclusivity should be limited in time and only extended if Sakura hits agreed certain sales targets. Here a time period of one to two years exclusivity could have been considered given that Bernie mainly operates in Europe.

Mistake number two was a one-off license fee of 1 million yen (8,000 euros). As well as misunderstanding the Yen to Euro exchange rate, Bernie receives no further licensing fees for sales of ‘Hit Maker’ by Sakura. Bernie should have negotiated a per unit royalty fee for all licenses sold by Sakura.

Mistake number three was allowing Sakura to freely ‘relabel’ the software. This means Sakura can remove all of Bernie’s branding and market ‘Hit Maker’ under a completely different name. This means that Bernie would lose all goodwill associated with ‘Hit Maker’ and would receive no benefit in future brand equity from sales by Sakura.

And mistake number four was allowing Sakura to redevelop the software. Sakura has the source code and the right to redevelop so she can get her development team to freely redevelop and change the software. Bernie gets no benefit from any improved or redeveloped software created by Sakura. Bernie has given it all away for 8,000 Euros! Bernie should never have licensed the source code (which allows redevelopment by a software programmer) nor should he have allowed the software to be redeveloped without having negotiated that he (i) owns the ‘improved’ software and can sell it to his other customers and (ii) gets a royalty from all sales of the new software version.