A contract is simply an agreement. Unless there are tax or other considerations at play which don't appear from the face of your question, it doesn't matter what you call it - a royalty agreement, a license agreement, a commission agreement, a joint venture agreement - you want an agreement that sets forth the terms that you've outlined. To me, the deal you want seems closest to a royalty agreement - you want to pay this investor royalties on the net profits (I assume you want to pay on net profits, i.e. profits after costs are deducted, rather than on gross sale revenues, but you could do it either way - obviously the percentage would be lower if you were paying on gross rather than net) you make on this one product - but again, the nomenclature is really unimportant.
There are many different ways to make a deal. Perhaps, in addition to the basic structure of the deal you've outlined, the investor will want a guaranteed minimum payment, so that, for example, he will receive a guaranteed minimimum amount even if the profits aren't as high as aniticpated. Perhaps you will want to cap the maximum amount the investor can receive in any one period. Maybe, instead of giving up all rights on spinoffs, the investor will agree to take a smaller percentage of profits from spinoffs. Or maybe, instead of giving the investor sole ownership of the product for a flat fee, you will agree to give him a 50% ownership interest. Maybe he will want a right of first refusal so that you can't sell your interest to anyone else without offering it to him first, or maybe he will want the first right to partner with you in spinoff products. Are you going to share risk as well as reward - what if you lose money on the product, or you face lawsuits alleging damages from a defective product? What, if any, expenses are to be deducted from revenues to calculate profit? Advertising? Shipping? Accounting and/or legal services? Taxes? Insurance? Wages? Will the investor have the right to audit your books to ocnfirm your calculation of profits? If so, who pays for the audit? How often can he audit? There are many, many, issues to consider.
The point is that the transaction can be structured in any legal way the two of you can agree on. The important thing is to try to anticipate any and all contingencies and cover them in your agreement, and to try to negotiate the best deal you can. Once you've done that, you (or your attorneys) can put those terms on paper and call it whatever you want....
Read More