Licensing Your Idea / Invention
How do I know if it is right for me?
Here are a few common questions that inventors ask about licensing.
What is licensing?
In basic terms, licensing means taking your idea, your “intellectual property,” and giving someone with a lot of powerful resources the privilege of using it for a price. You set the terms by which you extend this privilege. In return, they give you a rent check four times a year. This is also known as a “royalty” check. These quarterly royalty checks, and sometimes one-time advances on future royalties, are the means by which you will generate income when you license your products.
Why would I want to license my product for a 3% to 10% royalty when I can manufacture the product on my own and keep all the profit?
This is common question that requires a several part answer.
Regarding your level of ongoing involvement . . .
When you license a product to a manufacturer they’re going to advertise it, market it, manufacture it and put their money into the project. So you don’t need to raise money or run a company. That’s a pretty big plus!
Regarding distribution. . . .
Another great benefit of licensing is that the manufactures you’ll be contacting already have a network of retailers that they can plug your new product into. If you start a company on your own, not only do you need to raise money to start the company, you have to start from scratch and make new relationships with retailers so you can get your product into their stores.
This can be a problem since most retailers don’t want to deal with one-product companies. Retailers want to deal with companies that have ten, twenty or even hundreds of products. Many retailers don’t take one-product companies seriously and are very concerned that you’ll have enough cash flow to deliver on a consistent basis and on time.
When you license your product, the manufacturer will already have those important relationships with retailers, so all they have to do is plug your product in.
Regarding money. . .
Then of course there’s the money issue. When you start your own company and manufacture a product on your own, you will most likely need hundreds of thousands of dollars to manufacture market and distribute your product even if your product only cost pennies to manufacture. You need big money to market, advertise, distribute, manufacture and pay employees or contractors.
Successful inventor Stephen Key has licensed over twenty products during the past twenty-five years. However, about four years ago he started a business selling innovative guitar picks. He wanted to see what it was like to venture and manufacture a product on his own instead of licensing it.
His guitar picks only cost seven to eight cents a piece to manufacture and sold for almost ninety cents. The profit margins were huge and his products was a huge success right out of the gate, yet he still needed a couple hundred thousand dollars to start the company and he said he could have used additional $100,000 to better market his unique guitar picks.
Now we’re not saying you can’t start a company and manufacture a few thousand units. The problem is you most likely will not be happy with the small profits you make and other manufacturers will get the upper hand on you if you don’t get your product out in a big way and be first to market.
When you license your product to a manufacturer, they will have financial resources you could never have. Also, they may have ten, twenty or even thirty years experience in the industry of your invention. That’s a good combination, and that’s the power of licensing and teaming up with a big company!
With licensing, your licensee (the manufacturer you rent your idea to) invests all their money and takes all the financial risk. If for some reason they don’t perform, you get your invention back and you can then license it to someone else.
There is way, way, way less financial risk when licensing a product than when manufacturing and marketing a product on your own.
Stephen Key teaches techniques that allow you to protect and pitch your ideas for under $200. For some projects, you will need to invest more, however most products can be pitched with very little money invested. When you license a product, you don’t need to mortgage your house to raise money.
Time. . .
If you have two to four hours a week, you have enough time to license your products. You can have a full-time job, a business or be very busy with family affairs and still find the time to license products.
If you start your own business and manufacture a product on your own, you’re tied into that business for a bare minimum two years. And if you want to be successful, you’ll need to work eighty-hour workweeks if you’re serious about getting your product out there and onto store shelves.
When you license the product, the manufacturer handles everything that’s required to run the business, so you’ll have the free time to go about your daily life. Hopefully you’ll spend some of that free time working on licensing your second product so you can have a second royalty check coming in.
Why should a company pay me for my new product idea? Aren’t they just going to rip me off?
It’s very rare that a company rips off an independent inventor. There are a few reasons for this. One reason is that companies in general don’t want the liability and financial damages they would incur if you can prove they ripped you off. Also, they don’t want the bad press. What company would want a news story about how they ripped off an independent Inventors idea to show up in the paper? No company would want that!
Now, does that mean inventors never get ripped off? Of course it does happen from time to time. However, if you’re knowledgeable about creating a paper trail, by using tools like an inventors notebook and provisional patent applications to protect yourself, you can dramatically reduce your risk of having a company steal your idea.
Even if a company does steal your idea, you can quite often negotiate with them to receive a royalty or some sort of compensation. The last thing you want to do is end up in court. Taking a case to court can be very, very expensive.
Big companies are actually more afraid of you than you should be afraid of them. They have more reason to be paranoid about being falsely accused or sued than you should about them ripping off your idea. Over our ten years here at inventright we've never had a student tell us they got ripped off, however know of thousands of Inventors(not students of ours) that never work on their ideas out of fear and end up ripping themselves off.
So first I get a patent, and then what do I do?
No, no, no! Don’t make this mistake. This is a false assumption. We take calls at inventright every day from people who have filled their patent too soon.
Patents are very expensive. It’s important and very much part of the inventright aproach to licensing that you get some green lights before you spend significant amounts of money.
Getting a patent is positively and absolutely not the first step. You need to do a market search and several other things first, before you file a patent or even a provisional patent application which by the way only costs $110 and not the thousands of dollars a patent attorney is going to charge you to file a full utility patent.
You need to figure out which manufacturers you’re going to approach with your idea before you start filling patents and actually call them to run your idea by them. Some of the manufacturers you will approach may have been in the industry of your invention for 10, 20, or even 30 years. Their feedback is like gold. Get this critically important feedback from manufacturers before you invest any large sum of money. Can you imagine investing $10,000 in a patent just to find out that nobody’s interested in your idea?
Instead we teach our inventright students to spend $110 on a provisional patent application. This allows them to say patent pending for a full year while they try to sell their idea. It’s kind of like a temporary placeholder. It’s not a patent and you need to upgrade it within one year to a full utility patent. However, if no manufactures are interested in your invention, you can abandon your provisional patent and you’ll only be out $110 instead of $10,000. If a manufacturer is interested you can convince them to spend the money on the patent. You’ll never need a year to sell your idea using the Stephen Key (inventright) approach to licensing, so the provisional should give you the protection you need while you pitch your idea to potential licensees.
The inventright approach is to spend as little time, money and emotion on your project before you get some interest (green lights) from the manufactures you are calling.
I don’t have the money or skills to make a prototype of my invention. What do I do?
Well, there are many tricks you can use to sell your invention without having to have a prototype. The most important thing you need to realize when you’re licensing a product is that you’re not selling your patent and you’re not selling your prototype. You’re selling the benefits of your invention. So what do we mean by benefits? Here’s a few examples of one sentence benefit statements.
“A hammer that hits nails straight every time.”
“A ballpoint pen that writes twice as smoothly.”
These are examples of benefits statements. You can use these benefit statements along with drawings or pictures to sell the benefits of your invention.
If you’re following the inventright approach, you would use what we call a sell sheet. This is a one page piece of paper, preferably in electronic PDF format that has a picture of your invention or a drawing, the benefit statement we just talked about, your contact information and probably a few sub-benefits.
I’ll give you one example of how you can fake your prototype for your sell sheet. Quite often you can cannibalize or cut up a bunch of products that you buy at your local store. You can glue them together or attach them in whatever means necessary. Now, the prototype may not look that good in real life but if you take a picture of it from just the right angle it looks like a fairly finished product that will relay the benefits of your invention in your sell sheet.
For example, if you have a new backpack design, you could buy a backpack at the store and cut it up to make your prototype. Or maybe you have a new kitchen bowl. You could cut up two or three different plastic kitchen bowls and glue them together to make your prototype. Do the best job you can and with proper lighting you can make it look real! The beautiful thing about this is that your prototype doesn’t even need to work. It just needs to look like it works in the picture.
There are also many other methods you can use of course to fake your product in a sell sheet.
You see, the most important thing is that you relay the benefits of your idea, not that you have a perfect working prototype. Quite often the manufacturer can look at your sell sheet, see the benefits and say, “oh, yeah, sure we can make that”. So don’t waste your hard-earned money and time creating a prototype when it’s not necessary. Now sometimes it is necessary to build a prototype. If the manufacturer is sincerely interested in the benefit of your invention and they want you to make one, they’ll still be interested two weeks or sometimes even two months later if you let them know it will take you a while to make a prototype. But at least you’ve gotten some interest. You don’t want to spend $5,000 on prototype just to find out no one is interested in your invention. You won’t be able to play the licensing game very long if you’re dropping large amounts of money on prototypes. Spend you money carefully and after you get some green lights.
I don’t have a background in sales or marketing, how I go about selling my ideas?
You really don’t need any experience in sales or marketing to license your own ideas. What it comes down to is that no can be as excited about selling your ideas as you!
Stephen has licensed over 20 products and he studied art in college! He doesn’t have a background in sales or marketing. If you use common sense and take small steps every week towards your goals, you will get acceptance or rejection from manufacturers about each of your ideas. The most important thing is that you need to make those phone calls. Don’t play with your prototype forever or spend large amounts of money with patent attorneys. The truth is that you want to spend at least half your time calling companies and getting feedback. It’s all about making contact with manufacturers and going for it!
I came up with the idea, now I just want somebody to sell it for me? How do I find a company to do this for me?
You need to be very wary of companies that are one-stop shops and claim to do it all for you. If you want to read about the horror stories of invention promotion companies and how they empty inventors wallets, I suggest you go to www.inventored.org
Realize that no one can be as excited about your idea as you. Find those people that can advise you, however realize that you need to be the one in charge coordinating the project. You can’t just hand your idea off to a company and expect them to be excited about selling your idea. At inventright we take a very different approach. We teach you how to fish, rather than fishing for you. We empower and support rather than make big promises and empty your wallet.
Who writes the contract between myself and the manufacturer when I am closing my first deal?
Most patent attorneys will not be the right person to write the contract between you and the manufacturer. Usually an attorney called a licensing attorney is the person that writes the contract between you and a manufacturer. It’s very important that you get a licensing attorney to write this contract. All they do is write licensing contracts. That’s their specialty. Do not get a patent attorney or general contract attorney that’s only written a few licensing contracts to write yours.
How do I find a good patent attorney?
Well, first off don’t make a patent attorney the first person you talked to when working on a new product idea or invention. Here’s the problem. What is a patent attorney selling? They sell their services. And their service is to write a patent for you and fight with the patent office to get all the claims that you want in your patent.
Don’t make your patent attorney out to be something more than they are. Most patent attorneys have never brought a product to market and know little to nothing about licensing or commercializing inventions.
Many patent attorneys are good people and very intelligent. However there are quite a few that will tell you that you have a great idea the matter what it is. You see, they want to get that ten grand out of you for writing a patent. So please, don’t ask a patent attorney if you have a good idea. Asked them better questions like this. “I have done some research (show your research of prior patents and similar products you know to be the in the marketplace), is this invention patentable?”
Another tip for finding a good patent attorney is to find one that is practicing in the field of your invention. For example, if a patent attorney specializes in toys and you have a new silicon wafer technology, well. . . .that might not be the right match. So ask patent attorneys you are interviewing what their areas of expertise are. Another trick you can use is to go on the patent office website www.USPTO.gov and search all the patents that they’ve filed. Take a look at their work and see if you’re impressed with the quality of their patent writing skills.
What’s a common royalty rate?
A common royalty rate for consumer products is quite often 3-10%. Now you may be asking what is that 3-10% of?
It’s 3-10% of the wholesale price, not the retail price. So if a product sells at Wal-Mart for $20 and Wal-Mart buys the product for $10 from the manufacturer, then you would receive 3-10% of $10 for each unit that is sold.
So if you think your product is going to retail for $20 and wholesale for $10, you can calculate your royalty based on the number of units you think the manufacturer can sell each year.
It’s going to be advantageous to license products that can do large volume as opposed to small volume. The beautiful thing about licensing is that a major manufacturer can invest far more money than you ever could in a project and sometimes sell millions of units. These royalties can really add up if you team up with the right manufacturer. So if you have ten ideas and you’re trying to figure out which one to work on. Go with the high volume one rather than the low volume one. More than likely it’ll mean the same about of time invested in closing a deal, but reap much higher financial rewards.