You presented your innovative new product to a manufacturer and great news, they are proposing a licensing deal to you!
Congratulations! Inventors often spend years attempting to license their product unsuccessfully.
Now don’t kill the deal before it is done!
Many promising licensing deals fall apart because of the inventor, not the licensee.
Inventors put their blood, sweat, and tears (and precious capital) into their inventions. Unfortunately licensing deals often evaporate because of one of two issues:
- Inventor Greed
- Inventor Unwilling to Compromise
I wrote a blog about inventor greed in a previous blog. But here are some additional thoughts.
Often the inventor wants or expects a royalty percentage that is significantly higher than the licensee proposes. Let’s say that ABC Corp. proposes to license your product in exchange for an exclusive deal at a 3% royalty rate. But, you feel 5% is the proper royalty and is fair compensation. What you do next will either help you close a deal or make ABC get cold feet and back out of the deal.
Calmly ask ABC for specifics as to why they can offer only 3% when you feel 5% is appropriate. Often their reasoning is logical and encompasses things you did not know or consider. Then propose a compromise that honors their position while giving you a chance for more. You might propose that 3% be paid on the first 200,000 units sold and 4% would be paid on all sales over 200,000 units. In this way, if the product is successful, you will receive a greater reward, but the base rate matches their proposal. It shows that you are willing to compromise to reach a deal they (and you) can live with.
Inventor Unwilling to Compromise
In almost every licensing deal, the inventor has one vision for their product and the licensee has another.
The licensee may wish to use less expensive materials in constructing the product – resulting in a cheaper finished product. Also, the licensee may elect to market a product that encompasses some, but not all features of the product. Emotionally, the inventor may become very defensive, feeling their product is not fully appreciated by the licensee. For their part, the licensee is very focused upon maximizing profitability by minimizing cost and eliminating features that don’t seem essential to success.
If the inventor insists upon having only the highest quality of materials and all the bells and whistles included, the licensee will see the relationship as untenable and walk away from the deal. If the inventor asks himself: will the buyer really know the difference? In many cases, the answer is no. It is better to settle upon an imperfect deal, then be able to collect quarterly royalties and work on other products, than to insist on perfection deal and walk away with nothing.