In the previous post – O – Okay, What is my Patenting Strategy? – I mentioned that there were two paths forward with an invention: either building a business around it and “doing it all yourself” or licensing it to a manufacturer, in exchange for royalties. In this post, let’s talk a bit about the latter path – principles of licensing.
Let me start with two good reference books on licensing:
The above two books will give you a lot of valuable information.
There are two attractive elements to licensing your product: having a company to take all of the risk to manufacture, package, distribute and sell your product; collecting a royalty and freeing up your time to pursue other endeavors.
I can tell you from personal experience, taking the path of manufacturing, packaging and marketing your product on your own will consume your time and financial resources and is risky on several levels. Licensing transfers all of those headaches to someone else who, hopefully, is much more adept at it than you are.
Assuming you find a licensee for your product, what should you expect? You should expect they will want an exclusive license (no one else is allowed to manufacture or sell your product including you). Expect that the licensee will want to “refine” your product so it can be sold profitably. This means you should be prepared to make some compromises. The license may use cheaper materials and package and present it differently than you would.
Your key negotiating points will be the royalty percentage paid to you, the term of the agreement, and where, geographically it may be sold. Negotiate the best royalty you can but don’t be too greedy or you will kill the deal – a 5% royalty (or less) is quite common. In general, you want a limited initial term (perhaps two years or so) with options that will allow you to terminate the agreement if certain conditions are not met (sales volumes, etc.). The two suggested reference books address these points in some detail.
In the next post – Q – Question: How do you License Your Product? – we will describe approaches to finding a licensee for your product.