Topline Royalty Math
A 2% royalty on revenue is really 20% of profit — and the things you would have to get good at to keep the rest are things you should never learn.
- Difficulty
- Moderate
- Time to result
- ~weeks to results
- Steps
- 7
- Confidence
- 91%
Elan's answer to what deal terms matter starts with the number that scares everybody. Publishers throw out something like two percent, and the inventor thinks they should be getting eighty. But the publisher takes all the risk, does the printing, the relationship management, the sales meetings, and supports hundreds of staff — and crucially that two percent is of revenue, not profit, which puts it closer to twenty or thirty percent once the maths is run. Tim's complement is the counterfactual: with no scale, no thousand-SKU department and every agent and distributor to pay, self-publishing converges on the same number while adding real business risk. Elan's barcode story is the punchline for why you should not learn the difference.
Origin
Elan negotiated these terms from both sides — first as a licensee's counterpart while Exploding Kittens went through three publishers, and now as the publisher paying royalties on the three partnerships they have done, with Penn Jillette, Jeff Probst and Tim Ferriss. Tim brings the parallel from conventional non-fiction publishing, where royalties run up to roughly twelve to fifteen percent of cover.
Core principles
- 01The headline royalty is usually around two percent, which sounds absurd next to your sense of having invented the thing.
- 02The decisive question is what the percentage is taken on: two percent of revenue is not two percent of profit.
- 03On a topline basis, two percent typically works out closer to twenty or thirty percent of the profit once the maths is done.
- 04This is the opposite of Hollywood accounting, where a percentage of net income is defined in a Byzantine way that erases it.
- 05You can and should ask the publisher to show the spreadsheet — costs, responsibilities, total spend, projections, and your share.
- 06Rates range from roughly two to twelve percent; twelve puts you near fifty percent of profit and requires genuine star status.
- 07The royalty buys you out of risk: printing, relationship management, sales meetings and hundreds of staff you are not paying for.
- 08Advances behave differently than in book publishing, because a game is already effectively finished when the deal is struck.
- 09Beating the licensed number by running your own operation is possible but requires a meticulously managed business and sacrifices distribution at the top of the funnel.
- 10In success the royalty is perpetual — the faucet does not turn off, and a licensor can run a dozen of these a year with no employees and no supply chain.
How to run it
- 1
Do not react to the headline number
Expect an offer around two percent and expect to feel insulted. Elan predicts the exact thought: wait a second, I was the inventor, I get eighty percent, and you're offering me two.
Pro tip The emotional reaction is the negotiation's first trap; treat the number as incomplete data.
- 2
Establish the base
Find out whether the percentage is applied to revenue or to net income. Elan's key distinction is that two percent of revenue is a fundamentally different instrument from two percent of profit — and Tim names the contrast with Hollywood accounting's Byzantine net definitions.
Pro tip Topline is the tell that the deal is honest; net-based percentages invite definitional games.
Watch out A generous-sounding net percentage can be worth less than a small topline one.
- 3
Ask for the spreadsheet
Elan says you can ask them to break down the math: show me what you're spending, what your responsibilities are, what mine are, the total amount you're going to spend on this game, your total projections on what's coming in, and how much I make of that.
Pro tip A publisher who will not open the model is telling you something about the partnership.
- 4
Convert to an implied profit share and benchmark
Run the numbers until you can say: of the money that came in, I am getting twenty percent even though this document says two. Rates run from about two to twelve percent, with twelve putting you around fifty percent of profit and requiring you to be a rock star pulling real weight.
Pro tip Twelve percent is achievable but not as a first-time developer.
Watch out Chasing the headline rate at the expense of the base can leave you worse off.
- 5
Price the alternative honestly
Tim's warning is that unless you are excellent at running a meticulously managed business, beating those numbers is tough — you sacrifice distribution so the top of the funnel shrinks, and once you pay agents, distributors and all the small costs without scale, you approach the same number very quickly. And you are now running a real business.
Pro tip Tim's own confidence in experimenting with pseudo-self-publishing comes only from having gone the commercial route multiple times and run several businesses.
Watch out Tim's cautionary picture is the entrepreneur whose apartment is filled with unsold product they cannot move.
- 6
Refuse to get good at the operational work
Elan's rule is that you should not get good at the details you are buying out of. His barcode escalation is the illustration, ending with an exasperated 'help'. He now has a barcode person who does it for a living and is very good at it.
Pro tip Stephen Key's model, cited by Tim: take the licensing deal, negotiate the number up a little, and run twelve of them a year with no employees, no supply chain and no risk.
Watch out Unless you want to do it for a living, there is no upside in acquiring that skill.
- 7
Treat the deal as a partnership, not an exit
Exploding Kittens never pays advances, partly because the game is already roughly ninety percent done so they are not buying you off other projects, and partly because Elan wants skin in the game — the designer present every day, making it better together. That is why they do so few partnerships.
Pro tip In success the royalty is perpetual; the faucet does not turn off.
Watch out Elan notes they change licensed games significantly through testing, so expect the design to keep moving after signature.
In the wild
For the first Exploding Kittens box, Elan needed a barcode for retail. He researched it, found a site charging around a hundred dollars a year for unlimited barcodes, generated one and put it on the box. Then Target said it was the wrong format. Another hundred dollars, another format. Then a different barcode was needed for the pallet. Then Walmart used a different format. Then the code had to encode whether the product was picked up in China, Mexico or Poland — three more. Then a fourth if bundled with other games, and a fifth if it shipped into Arkansas.
→ Elan's conclusion — you should not get good at this, why would you want to — and a dedicated barcode specialist on the team.
Tim describes making an audiobook product early on that he was sure would sell millions. He did no market testing, none of that stuff, and was, in his phrase, high on his own supply. He ended up with an entire garage full of the things, which ultimately melted in the heat. He notes it was a huge financial risk at the time, and that the same level of self-delusion and lack of experimentation a little later in his career could easily have been a recipe for disaster.
→ A first-hand cost of choosing the keep-everything path without testing, which underwrites his defence of licensed percentages.
Elan explains what the royalty is really insuring against. Amazon accepts all returns and makes them the vendor's cost: a customer buys Exploding Kittens for game night, spills beer over the cards, boxes them back up and returns them, and it becomes Elan's cost — hundreds of times a week. Worse, people buy a counterfeit copy for a dollar plus the real version, keep the real one and return the counterfeit, and that twenty-dollar counterfeit also comes back to him. Targets and Walmarts are willing to negotiate on this; Amazon's answer is that maybe a different platform is for you.
→ A concrete illustration that the licensor's percentage is buying immunity from a category of loss most inventors never model.
Common mistakes
Judging the rate without checking the base
Two percent of topline and two percent of net are not comparable instruments. Elan calls the distinction very important precisely because the same headline number can mean a fifth of the profit or almost nothing.
Assuming self-publishing keeps the margin
Tim's arithmetic is that you sacrifice distribution, shrinking the top of the funnel, and then pay agents, distributors and a long tail of costs without any scale — converging very quickly on the licensed number while carrying all the risk yourself.
Learning the operational trade you are paying to avoid
The barcode spiral has no natural end, and neither do contract terms, pallet specs or returns policy. Elan's rule is that unless you intend to do it for a living there is no upside in becoming competent at it.
Signing without the post-sale restrictions
Elan notes that a straight sale lets the retailer dump the product in a bargain bin, resell it, or in a badly negotiated deal force you to buy it back. The restrictions on what a retailer may do after purchase are meticulous, the contracts are long, and this is exactly the part you hire someone for.
Is it for you?
Best for
First-time inventors, designers and authors evaluating a licensing offer against the fantasy of keeping the whole margin.
Not ideal for
Operators who genuinely want to build a manufacturing and distribution company and have the experience to run one meticulously.
From the transcript
“most publishers are going to throw a number at you like 2%”
“that 2% isn't 2% of the profit. it's 2% of the revenue”
“that makes that 2% probably closer to like 20% 30% once you do all the math”
“you should not get good at this. why would you want to get good at that?”
From the episode
#821: My Two-Year Secret Project, COYOTE — The Strategies and Tactics for Building a Bestseller from Nothing with Elan Lee of Exploding Kittens