Licensing an Invention

Licensing your invention, the options.

There are really only two main ways to make money with an invention: license your patent for royalties, or produce your invention yourself, and market it. See also my article, Should I Become a Producer?

What is licensing?

Licensing is the granting of the right to use, and/or make, and/or market your invention by another individual or a company. Most licenses are exclusive, that is, they are granted to only one individual or company. In exchange for this grant the inventor is paid a certain amount of money -- usually a small percentage of the net amount that the licensee receives from each sale, not the retail price. In almost 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 issues. Those few lucky inventors who work this way usually come out of the toy industry, and have the right contacts on the inside.

Why won't a company pay me for my un-patented idea?

Nearly all companies, especially large corporations, have a philosophy about inventions that reads like this: "All inventions are in the public domain unless an inventor proves otherwise by getting a patent." Ideas are abundant -- like flies at a garbage dump. Only ideas that are developed and patented (or ideas for which patent plans are definitely in the works) are rightfully called inventions in my opinion.

Companies 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. In any case if 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.

Thus, nearly all companies refuse to read your letters about your invention as soon as they become aware that you intend to submit it, with or without a patent. They will return your mail with a note stating that it has not been read, and that they do not accept unsolicited idea or invention submissions unless patented. Some companies won't even accept them even if patented. In the auto industry, for example, there exists an arrogance that began with Henry Ford. Ford said that he would never pay any inventor a royalty. Things in Detroit haven't changed much. The auto companies believe that any idea that is worth something is an idea that they certainly must have thought of first regardless of who took the initiative.

What about the television ads that claim they will submit my idea to industry?

While such firms fall short of being outright scams, in the opinion of seasoned inventors and professionals they have highly questionable ethics. (The CEO of one such firm has been prosecuted and has gone to prison.) You are led to believe that your idea has great potential, and can be licensed. You are asked to sign up to an "easy"payment plan for which you get a lot of fancy boilerplate and flattering general information. Typically this will cost you $10,000 or more, and success rates are usually only around one percent.

If you believed that Publishers' Clearing House really meant it when they promised that you were almost certain to win the ten million dollars (or whatever outrageous promise they made), then you'll do nicely as a candidate for one of the TV invention service firms.

What such firms do for you, you can do for yourself at almost no cost.

If my idea is patented, how do I find a company to license it?

There are five main ways:

1. Locate appropriate companies, and contact them.
2. Engage a marketing agent to handle the task.
3. Attend a trade show.
4. Use free publicity.
5. Ask the Inventor-mentor.

Appropriate companies.

Go to the library, and ask the Reference Librarian for The Thomas Register of American Manufacturers. These huge directories cover all of the principle manufacturers in the U.S., and are categorized for inventor-friendly searching. Write a letter to the Director of Marketing of appropriate companies. (Get his or her name from one of the other reference books, such as Dunn's or Standard and Poors.) Write that you have a patented invention that you wish to submit, and ask how to proceed.

Most likely you'll get an information brochure that tells you the rules, and you'll probably have to sign away all of your rights except those granted by your patent. You won't get your foot in the door until you sign, and usually its okay to sign. As long as you have your patent no company can legally use your invention until you license it.

Marketing agents.

Marketing agents usually keep a low profile because they would be besieged by inventors with loony inventions if they didn't. Some advertise in Inventors' Digest magazine. But those who advertise often want a fee up front and may take on inventions that they know probably won't get licensed. Agents that don't charge an up-front fee don't accept every invention proposed because most inventions simply can't be licensed, or will require far too much work to close a deal.

Ideally, an agent would work like a real estate agent, listing every invention proposed, asking no up-front fee, and working on a small percentage like six percent. But licensing an invention is nowhere near as easy as selling real estate. Most agents will want between 20 and 50 percent of your net income from the license. Is it worth it? I believe that it is. The typical inventor is not well equipped to handle licensing, and many who attempt it fail. An agent, on the other hand, must produce or starve. And any percent of something is much better than 100 percent of nothing.

Trade shows.

Inventor trade shows, such as the Yankee Invention Exposition, held annually in Waterbury, Connecticut in mid-October, is visited by agents and new-product scouts. The odds are not high that you'll connect with an agent or scout, but the cost to exhibit is low, and you get abundant feedback for the public on the worth of your invention.

Trade shows that exhibit hardware, housewares, gifts, etc. are easily found on the Internet or in directories at your library. These shows are expensive, and some have a waiting list. But they do produce results. You may connect directly with an interested manufacturer, and not need an agent.

Free publicity.

By getting national publicity in newspapers and magazines you may connect with a manufacturer that is interested in licensing your invention. Jeffrey Dobkin's excellent book, How to Market a Product for Under $500 tell you all you need to know in order to launch a good free publicity campaign.

Ask the Inventor-mentor (that's me).

I have a list of legitimate agents that I will provide to you if you use my mentoring service. I can't promise that one of these agents will be right for your invention until I know what your invention is, of course. But I'll try to give you a specific name, address, and phone number. These are people who won't charge you an up-front fee if they take on your invention. Obviously, I can't publicize my list here or these good guys and gals would be bombarded. As I said, the good guys must keep a low profile.

What percentage can I expect as a royalty?

Generally something between one and ten percent. For a mass-produced consumer item for which competition is fierce, most likely the royalty will be close to one percent. For fad items that will have a limited life, and for which there is little or no competition, you may get as much as ten percent. Most inventions license for around five percent or less.

Will I get an up-front lump sum?

A large corporation may feel that an advance on royalties is fair, and pay something like $10,000 up front. A smaller company may want to preserve its cash for tooling and market launch expense, and work strictly on the agreed percent paid quarterly. In any case you should stipulate a reasonable minimum annual payment or the licensee can "sit on your invention," and have little incentive to get it to the market.

An up-front payment is nearly always an advance on royalties, not a bonus in addition to royalties.

Copyright © Jack Lander, www.inventor-mentor.com.