Do you have a viable invention but lack the fund to push it to the market? If YES, here is how to license your invention to a company profitably in 7 easy steps.
What is a License?
A license is said to be an understanding or agreement where you let someone else commercially use or develop your invention for a period of time. In return, they have to pay you money, usually either a one-time payment or continuing payments called royalties.
As the owner of the invention, you will be the “licensor” and the party receiving the license for your invention is the “licensee”. According to experts, what makes a license attractive is that the licensee takes up all the business risks, from manufacturing to marketing to trying to stop people who infringe on the product’s patents. It all rests on the details of the agreement, the inventor/licensor can sit by the mailbox and wait for the quarterly royalty checks. Though licensing means less work, it can also mean less profit.
Is Licensing your Invention Really the Best Option?
You need to understand that the company that accepts the risk of mass producing and selling your product will claim a much larger percentage of the revenue. Moreover, by licensing, you lose control over the execution of “your” idea. Also note that in all cases, the invention is covered by a patent.
Only in a rare case, such as an undiscoverable secret process or secret ingredient, will a company license an un-patented invention. Or, in the case of toys, inventors who have an “in” with the toy manufacturer often work on a handshake basis. This is because the life cycle of many toys is over before the patent is issued.
Companies tend to avoid inventors who come to them with “a great idea” because the company may have had the same idea in the past and abandoned it; or it may have the same idea on a back burner; or it may be working on the same idea presently.
But if for any reason the company eventually moves forward with its own idea, and an inventor who has submitted the same idea sues because he or she believes his idea was stolen, the company is at risk. Juries may see these cases as latter-day “David and Goliath” conflicts and side with the inventor.
Most times, return the mail with a note stating that it has not been read, and that they do not accept unsolicited idea or invention submissions unless patented. Have it in mind that some companies don’t accept them even if patented. Also statistics has it that the odds of licensing success can be low.
However, if you have a keen mind for inventing, with little or no interest in business and all its challenges. Or maybe you’re good at both, but you prefer to focus solely on developing ideas instead of launching them into a full-scale business. Then the licensing route is an option that suits your needs perfectly. Licensing can also be a great option for those who lack the financial resources to commercialise their ideas.
7 Steps on How to License your Invention to a Company Profitably
There are several steps to successfully licensing your invention to a company. But the most important or rather the very first steps will be to find the right people to review your idea to ensure that it has appeal. After that you will have to raise the money needed to develop and protect your invention such that it can be licensed in a complete form to a third party.
Then thirdly, you need to present your invention to a licensee in a marketable fashion, including any necessary instructions or support. Just as there are steps to starting your own business, there’s a smart way to approach licensing your invention.
- Identify and Research your Target Companies
You have to understand that companies will only license inventions that fit their current or future business plans. In general, the invention must be a perfect fit for a licensing deal to take place. Finding the right target is as important to licensing success as the invention itself.
You can start by putting yourself in the company’s shoes and look at things from its perspective. Note that to a greater or lesser extent, all companies suffer from Not Invented Here syndrome.
Walking in with your great invention, to a certain extent, challenges the abilities of in-house product developers. Have it in mind that finding the ideal targets for your licensing needs you to become an expert in the market for products similar to and competitive with your invention.
- Approach your Major targets
Indeed licensing deals can be done for inventions that are not yet protected by issued patents. This makes things complicated as you need to get a Confidentiality Agreement in place prior to disclosing the details of your invention. A fair Confidentiality Agreement will prevent the corporation from knocking you off (at least for a couple of years). Nonetheless, a fair agreement will also tie the corporation’s hands.
When the corporation agrees to not knock you off, it is limiting its ability to respond to competitors in the marketplace. Without disclosing details, you must convince the corporation that your invention is worth investing time and accepting constraints.
- Entering Into A Confidentiality Agreement
Do not forget that Confidentiality Agreement is the inventor’s most basic tool for protecting intellectual property. Intellectual property means ideas, designs, prototypes, equations, formulas, software, pictures, music, story ideas, business plans, pending patents, market research, in short, anything a person can think of.
Also known as a Disclosure Agreement, Non-Disclosure Agreement (“NDA”) etc, the Confidentiality Agreement allows an inventor to disclose intellectual property without losing rights to that property.
Note that the value of any Confidentiality Agreement is roughly proportionate to the difficulty of obtaining it. At one extreme are suppliers that have little or no issue in signing strong agreements. At the other extreme are potential licensees that are reluctant to sign anything but the weakest sort of agreement.
- Get Ready To Negotiate A Licensing Agreement
Note that the best time to get ready for negotiation is prior to contacting a prospective licensee. You never know how far an initial conversation may go. If you hit the right person on the right day you might end up with a deal quite quickly. This will only be possible if you are prepared.
Have it in mind that being ready means you should have clarity on two things: The potential value of your invention to the licensee and a deal value that would make you happy: A dollar amount for a buyout or a sum of money that is paid monthly/quarterly/annually. Also note that for a deal to take place, the licensee’s value must be equal to or greater than the value you need to be happy.
When your invention or product is new, no one really knows what it will be worth. Marketing and distribution along with social and economic factors are as important as the product itself. There are two basic forms of licensing deal, buyout and royalty.
- Buyout: in a buyout deal, the licensee makes a single payment to the inventor and owns rights to the invention ever after.
- Royalty: while in a royalty deal, the licensee makes ongoing payments to the inventor related to the commercial success of the invention. The licensing contract generally specifies annual minimums and other things to insure performance by the licensee. If the licensee fails to perform as specified by the contract, it loses some or all of its rights to the invention.
- Presenting Your Invention To A Company
In this form of business agreement, there is nothing like a face to face meeting to move things along quickly. You can read things in a person’s face that will never be communicated by phone or email. You can answer questions on the spot. Your mere physical presence will cause the prospective licensee to treat your invention with more respect.
It is advisable to have a partner (or advisor) with a marketing/sales background attend the meeting with you. This partner can speak on the marketing aspects of the invention while you talk about the invention itself. He/she can also pick up on things you miss and help to steer the meeting in a productive direction.
- Negotiating The Licensing Agreement
You need to clearly understand what you need if you want to succeed in negotiation. If you don’t know what you need then you’ll never be ready to say yes. First and foremost, you need to be honest with yourself and determine a deal value that would make you happy.
If you seriously consider your alternatives and have a clear-eyed view of what it takes to develop, manufacture and distribute your invention, then you should end up determining a deal value that will not only make you feel good, but also enable you to conclude a deal with a licensee.
Also if you’ve determined a deal value honestly and that value can’t be met by a licensee, then you can feel good about walking away from the deal. Knowing that you can walk away is a strength that will serve you well throughout the negotiating process.
- Signing a Deal
No matter how good your deal is, no matter how diligent and hardworking the licensee, you will likely see ways that more could be done. Note that a licensing agreement is like a marriage between two individuals after a strenuous courtship. Good marriages require work from both parties.
Once you get married, you must continue paying attention to your spouse otherwise the relationship will sour. When you sign your deal, the licensee sees the value of your invention and has no conceptual problem with paying you royalty. But as time goes on, the licensee tends to forget where the invention came from.
Maybe people left the company or perhaps the company sold its rights to your invention to another company. Either way, at some point in the future, it’s virtually certain that someone who doesn’t know you will review the profitability of the product line that is based on your invention.
8 Places to Find Potential Companies That May Pick Interest in your Inventions
Your invention can be said to be useless if it cannot be commercialised. At some point, either during your research or at the point when you have everything ready including your sell sheet, you need a list of companies who you feel might be interested in licensing your idea. Below are 8 ways of finding potential licensing contacts.
Once you have found company names using the methods above, you can research further to find out actual contact names of people at the companies. For example take your company name, and then in Google search Marketing Manager, Company Name. Try other search variations too like Sales Manager, Company Name.
With any luck this will give you the appropriate names you need, so that when you cold call the company you know who to ask for by name.
Quite often when you search in google, the results you find will be part of LinkedIn or similar sites like Jigsaw which hold business details. Another thing you can also do once you have a contact name is google the name and company and sometimes you will be lucky enough to find a direct telephone number or email address too.
According to statistics, LinkedIn is great for finding company contact details and also for additional research. You can search through using either the people or company search. LinkedIn also has a huge range of groups which may be applicable to your niche.
You can start by joining some of the groups for your invention niche (some groups are easier to join than others). Look through conversations in the discussions, and see if there are any people or companies that would make useful contacts. You can also post enquiries and ask for suggestions in the discussion groups regarding your invention idea.
c. List of Inventor Friendly companies
There are various places you can find lists of inventor friendly companies. Make sure you double check the terms and conditions of all the companies as some insist on patented inventions.
d. Check the Labels in the Shops Online and Off
You can locate potential licensees by simply finding similar products in the shops and to take notes from the labels to see who makes the products. Quite often the labels will also tell you the web address of the company for further research. You can also search online shops to see who makes products in your niche.
e. Leverage sites like Alibaba
You can use sites like Alibaba to search for manufacturers of similar products to your invention. Note that you can choose which countries you want to look for manufacturers in too.
f. Trade Exhibitions
Have it in mind that if you go to a trade exhibition, you can collect company details for potential licensees, but even if you don’t, many will list their exhibitors on their website with some basic details about them.
g. Associations for your Niche
Find out if there is an association for your niche (google it) and then look through the list of members to find potential suitable companies.
h. Magazines: You can also buy a magazine related to your niche and see what companies are advertising similar products to yours.
In conclusion, when preparing to license your invention to a company, you should consider some factors to avoid making crucial business mistakes. First, set realistic expectations. You shouldn’t expect a million-dollar deal, it’s doubtful you’ll retire after licensing your first product.
As an inventor, your goal should be to get as much up-front cash, as high a royalty, and as high an annual minimum payment as possible. Of course, the company will be gunning for less risk–which means a lower up-front pay-out, lower minimum payment requirements, and as low a royalty percentage as possible. Also note that most companies will want to have exclusive rights to distribute the product globally.
However, this is subject to negotiation. Depending on each party’s motives, the agreement could actually divide up the markets in many ways. After a licensing agreement has been secured, it is important to make sure that your patent is maintained in force by timely paying any required maintenance fees.
Failure to maintain your patent could result in termination of your licensing agreement. It may also be necessary to monitor whether your patent is being infringed, as enforcing the patent against infringers may continue to be your responsibility as a condition of the license.