When it comes to inventions, how do you make money?
After perfecting an invention, determining the marketability of the invention or idea, and then proceeding to protect it by patenting, the inventor has to decide how he intends to earn money from the invention.
Since the cost of manufacturing the invention directly can be quite high and require a lot of finance, most inventors decide to license their inventions to cash in on their ideas.
What does it mean to license your invention? What's a licensing agreement?
Licensing an invention means you (the inventor) are agreeing to sell the rights to your invention (known as "intellectual property") to a company, manufacturer, or other entity.
The ultimate goal of a licensing agreement is for the inventor to profit from it.
This happens when the partner, be it a manufacturer or other, produces the invention and sells it for a profit.
Licenses usually grant the proprietor (inventor) a percentage of total sales of the product. There are other financial arrangements available through contracting, but this approach to collecting royalty fees is most widely used.
In a licensing agreement, the inventor gives the manufacturer in question the rights to produce and sell the invention.
Why should inventors consider licensing their inventions?
The easiest way for an inventor to commercialize his invention and make money is by licensing.
Licensing is tantamount to leasing out the invention to a third party, usually the manufacturing company.
By licensing the invention that came from your idea, the inventor grants the company the full right to manufacture and sell the invention, or use the idea to facilitate the manufacture of a consumer product for an agreed period of time and within a specific and agreed location.
In return, the manufacturing company pays the inventor, for the rights granted them, a per unit or percent royalty on all sales over a specified period of time or a straight lump sum payment to buy out the inventor.
When the inventor grants the company such right, he is granting a license, which is a legal agreement between the inventor, known as the ‘licensor’ and the company that receives the right, known as the ‘licensee.’
The licensee bears the burden of production, distribution, sales and other business risks.
The licensor, on the other hand, does not incur additional risks and just simply waits for the periodic payment of royalties, giving him the time and space to work on more inventions.
One thing inventors should note is that by licensing an invention, the licensor cedes control over his invention and is entitled to a smaller chunk of the profits from sales.
The inventor may decide to grant an exclusive license which involves licensing to only one party.
Alternatively, the agreement may be non-exclusive, in which case the licensor does not guarantee that the right to the use of the invention will not be given to another manufacturer.
In some other cases, the license to the patented invention may be given to two companies within an industry who are not direct competitors or who target different markets.
The exact amount of money an inventor receives upfront and in royalties for licensing an invention depends on different factors and vary between industries. Typically, it is between 3-5% of sales and often depends largely on the expected or calculated profit margin.
Apart from this, the uniqueness and marketability of the invention has a huge say on how much royalty will be paid over time.
However, the possibility of an inventor reaching a licensing agreement with a manufacturing company or other parties depend largely on patent protection.
Quite frankly, no corporation or manufacturing company will be interested in reaching a licensing agreement with an inventor of an unprotected or undeveloped idea or invention.
Put simply, without patenting an invention or at least in the process of patenting (patent pending), an inventor has next to no chance of safely licensing or selling the invention to any company.
Some options for collecting royalties in invention licensing agreements
If the inventor decides against the single lump sum payment option, there are a number of payment options of royalties that could be included in a licensing agreement, depending on the preference of the inventor and his negotiating power.
Steps to reaching a successful invention licensing agreement
Even as licensing an invention could be the easiest path for an inventor, there are a few steps that must be followed diligently before successfully reaching a licensing agreement:
Feel like you are an expert on invention licensing agreements now? If not, I've taken a bit more of a layman's route to explaining licensing inventions and how to make it a profitable venture:
Think Smart: You Can Make Serious Cash From Your Invention This Way
Or, if you are ready to take the next step, get in touch with us about helping with your licensing deal.