Hi,
It appears they want to offer your images for use on a variety of novelty products.
There are a couple ways to charge for this:
One is simply a flat fee for usage with certain limitations. This, for example, might be what Hallmark Cards would do to obtain relatively exclusive usage of an image they'll use in a variety of ways. How much would be charged varies tremendously, depending upon exactly how the image would be used, in what volume, how exclusive the client wanted their usage to be, how long the term of usage might be, if there were a right of renewal, if there are multi-image discounts, etc.
This situation appears a bit different. Looking at their website, I suspect they don't actually produce the product until it's ordered by one of their customers. So quantities can only be guessed at and everything is very speculative until the site is up and running and sales start being made. This might call for another pricing model.
It could be a somewhat smaller flat usage fee, in addition to some sort of royalty amount paid on each product sold using that particular image. Both of these are entirely up to negotiations. A smaller fee might mean higher royalties, and vice verse.
The flat fee portion, an up front payment, might be attractive to the photographer in some respects, as the piece by piece royalty payments are largely an unknown future payment that will be determined purely by whether or not people like the image enough to buy products imprinted with it.
On the other hand, there *might* be more potential income, over time, going with a mix that's more biased toward the per item royalty payment. However, the photographer doing this is risking more and needs to be confident that his or her images will sell well. Since it's a brand new adventure, it's pretty hard to predict, isn't it?
Your friend might prefer something more weighted toward royalties. That would help him keep his upfront costs low and allow him to pay you as sales come in.
In fact, it could be purely a royalty based payment scheme.
On the other hand, if he's a well-funded start-up he may prefer to buy usage rights up front and not have to pay out any royalties later. He's then shouldering more of the risk, but if he thinks sales will be good he could expect to retain more of his profits over the long run.
Honestly, I don't have any amounts in mind, for either the flat usage fee or the per-item-sold royalty, or a mix of the two. There's just not enough information to even take a stab at it.
Talk more with your friend about his preferences. Also try to get some idea of reasonable sales expectations or predictions, then work with him to arrive at a model that both of you can live with and feel is fair.
I often suggest getting the book "Pricing Photography" by Michal Heron, in situations where people want to know how much to charge. But, I'm not sure if it will have good recommendations for this sort of thing or not. Maybe there's something in the book you can adapt... I know it contains some information on royalties and usage of images on products.
