Establishing royalty deals with existing brands can be a powerful and profitable method of distributing your invention.
Inventor FriendlyWith the pace of innovation and shorter product life cycles, companies are in need of new inventions.
Distribute WorldwideLicensing allows inventors to leverage a company’s brand and position in the marketplace.
Lower Cost and RiskThe inventor supplies the intellectual property while the company ramps up manufacturing and sales.
Key Components to Licensing
Licensing could very well be the most lucrative way to make a living today. At its basics, licensing is the selling of intellectual property to a person or business that wishes to produce it for a profit. The intellectual property could be a patent, copyright, or an idea.
Actually, licensing got much of its start with Disney’s creation of Mickey Mouse some 80 years ago. As the character took off in popularity a businessman who wanted to put the character on 10,000 wooden pencil boxes paid for permission to do so. Thus, licensing was born. Since then, there has been all sorts of products with the Disney characters on them, from shirts to lunch boxes. In all of these items Disney receives a percent of the wholesale price of anything depicting its characters. They don’t need to manage all sorts of factories, worry about payroll to all of its employees, find distributors, nothing. After the manufacturer does all the work to make and sell the product, Disney receives a lion’s share of sales. If this is not an argument for licensing, I don’t know what is!
Common Licensing Questions…
But wouldn't I make more money if I manufactured it myself?
The short answer is “yes”. But then reality hits. Handling the manufacturing either domestically or overseas requires a large investment of time and money. First you will need a rock-solid business plan, inventory financing and product liability insurance. You must work with engineers, industrial designers, sourcing agents and establish a sales and marketing team for distribution. Tooling can cost 10s of thousands of dollars and commonly exceeds $100,000 – and that is before you have manufactured or sold a single unit. Becoming a vendor to the large retail stores is extremely difficult especially if you only offer a single product, and if you do, you often don’t get paid until 90 days later.
It is a tough road and very few ever become successful. But if you are willing to risk your home, car, and financial security and have the needed skills to manage a factory and make your product sell, I hope the best for you. It is an option and some people do succeed. Yet the main question for any investment ought to be, “How can I limit my risk as much as possible and maintain the greatest reward possible?” And I would suggest the best answer to this question is found in licensing.
Will companies actually pay me for my invention?
Not only will they pay you, but if your invention sells, they will pay you handsomely. There is a reason why these businessmen are where they are. They did not get to the top of a company through a lack of business sense. Rather, they understand that good business transactions reward those who make you money and increase the value of your stock.
So, if you make them a profit they are more than willing to compensate you. They have good reason to treat you well. Their sole business is to manufacture and distribute products that will sell, and since the market is changing so often, they are always in need of new ideas.
Which company should I license my invention to?
Picking the right company to license your invention is crucial in the first stages. Without knowing where to go you are destined to endlessly search in the wrong places. It is important to research the specific industry and markets to understand where your invention would sell and which company has a strong brand and the distribution channels to fully exploit your invention.
Be sure to avoid companies that manufacture a product on a job basis. They have no distribution channels and are quite expensive. To get your product on the shelves you still have to do all of the work of packaging, marketing, and distribution. There is a great financial risk in the beginning when working with these manufacturers since they require upfront money to produce your product on a per unit basis.
What aspects of the licensing agreement should I be aware of?
As we have always said, we seek to establish fair and lucrative deals for the inventors that we represent. But to do this there must be certain elements present in the licensing agreement. The following is a short list of some of these elements that you should be aware of.
1. Advance in royalty fees: For exclusive license agreements, it is very common that the licensee would pay an advance toward the first year’s royalty.
2. Yearly minimum royalty or performance requirements: This is either a yearly minimum payment or a yearly unit volume that the licensee must hit to retain exclusivity. The amount usually gets larger every year to allow for the licensee to ramp-up and distribute your product. Also, it provides the inventor with assurance that the licensee will seek to develop your invention and not just let it sit dormant.
3. Insurance covering the inventor: This is an agreement that the licensee will, at their cost, buy an insurance policy covering the inventor for $1,000,000 in damages and send the inventor a certificate which shows that they are on the policy. Such a clause in the agreement provides protection for the inventor in the event that the invention causes harm or injury to those who use it.
4. Right to an audit: If the numbers do not seem accurate, we can arrange for an audit to be done by an accounting firm in order to determine if the royalty checks received were fairly distributed.