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It is my first time designing an album cover for a client and they want me to sign a contract giving up my rights to the design so they can use it in other places besides the album cover (posters, bus wraps, etc.) and sell merchandise with it.

I have no idea about how album cover artwork usually works. Is it customary for the designer to retain their rights to the artwork they design for the cover? Does the designer typically charge a royalty or licensing fee when the album artwork is going to be used to sell merchandise?

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There's nothing really "customary". You can agree to anything, including selling all rights. Clients can often ask for all rights, that's generally fine. But the request does not mean you must agree to it. And failing to meet that client request can alter the working relationship with the client. Some clients are adamant about this. If you are equally adamant about not selling rights, well, the relationship may be untenable.

By default, artists retain the rights to their original works in almost all instances, there are 9 ways they don't. William Fisher's lecture on copyrights. Specifically Lecture 5 part 3 explains the 9 instances where artists do not retain the rights. There is a 10th... if you are an employee or otherwise under a work-for-hire agreement.

It is not unusual for the transfer of rights to be part of a client agreement.

The important factor is, if you are selling rights, the price should reflect that sale.

Some possibly helpful questions:

Ensure you have a contract detailing what rights are transferred and the fees associated for the artwork and those rights. And make certain any rights transfer is contingent upon full payment by the client.

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