Invention Licensing And Collecting Royalties

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.
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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. 
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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.
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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.

​They include:

1. Net sale royalties: this is the commonest payment option for licensing. It basically involves charging a specified amount of money directly on the projected cost of the goods to be manufactured using the invention or invention idea. It is calculated beforehand and fixed to the amount the goods or products will cost and a certain percentage of the total sales is agreed upon to be paid to the inventor. Also, the frequency of payment is also agreed upon and stated in the agreement. This method of royalty payment is common and more popular with inventors because a successful invention guarantees that the inventor will be handsomely compensated over the period of use of the invention or idea. However, an unsuccessful invention means that there would be no royalties paid. 
2. Per unit royalties: in some cases, especially where there could be fluctuation in the prices of the manufactured goods or products, the inventor may decide against employing a royalty payment system based on net sales and opt for a payment plan that involves being paid based on the number of units sold. Where the prices of goods made from the invention of idea plummets, the revenue from net sales is directly affected. Hence, choosing to be paid per unit of goods sold guarantees that the inventor will not be affected by the drop in prices. Earning a few amount of money per unit of sales could turn out better than having a percentage of the net sales at the end of the day. However, because manufacturers are quite aware of the possibilities of price fluctuations and drops, they seldom commit to a per unit royalty payment plan.  A strong negotiating power could tip the scale in the favor of the inventor though. 
3. Per use royalties: this payment plan is employed when the invention is involved in the production of an end product. This means that rather than being sold directly, the invention is a plan or method used in the process of producing other consumer goods or products. Due to the fact that a net sales royalty system will not be able to adequately quantify payment, per use royalty is employed. Payment is made depending on the number of times the invention is used in the manufacturing process.
4. Sliding royalty rate: often referred to as fluctuating royalty rate, this is a rate that vacillates during the period of licensing the invention. The inventor might decide, in the course of the licensing time, to increase the royalty rate due to inflation or increased sales. Also, the manufacturing company may look to decrease the royalty rate if sales plummet beyond a certain point. 

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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:

1. Finding the right company: to successfully license an invention, it is paramount to engage in a comprehensive research to identify the right company to reach an agreement with. Actually, manufacturing companies as a rule, will only consider reaching a licensing agreement with an invention that aligns with their short and long term goals and plans. Inventors also have to target companies that will positively assign value to their invention. Hence, it is always beneficial to the inventor to look for the company who would attach the most positive value to the invention or invention idea. 
2. Approaching the target company: it is imperative that the inventor successfully persuades the company that his invention is worth putting efforts and time into, without divulging delicate details of the invention. Here, the inventor has to be able to keep the major parts of the invention covered but still revel enough to pique the company’s interest. The inventor must elucidate the various reasons why the consumer will love his invention, how it will trump the competition and the inherent profits. 
3. Reaching a confidentiality agreement: also known as the Non-disclosure Agreement, this enables the inventor to divulge core details of his invention, prototype or plan without fear of losing his rights. Unless a strong confidentiality agreement is reached, an inventor stands the risk of losing some patent rights. 
4. Negotiation preparations: preparation is key in sealing a licensing agreement deal. Hence, the best way to ensure success is to prepare for negotiations before getting in contact with target companies. The inventor must have a clear value of the potential value of his invention and the actual money (deal value) he wants to receive as royalty periodically. Obviously, for the inventor to consent to a licensing agreement, the company’s offer must be greater or equal to the deal value.
5. Initial invention presentation: the inventor must be present to walk the licensee through his prototype. By having a working prototype, the inventor would more accurately and easily explain the purpose and need of the invention. This first presentation is key because it makes or mars the inventor’s chances of reaching a licensing agreement. 
6. Licensing agreement negotiation: the inventor must fully and really understand and accept the value of his invention, the market, the royalty rate of his specific industry and he must know fully well what he wants from the negotiation. When he has a clear idea of the value of the deal, it makes working out an even more favorable agreement easy. Also, the inventor needs to be able to confidently walk away from a negotiation that doesn’t suit him. 
7. Sealing the licensing deal: it is absolutely normal that even after sealing a licensing agreement deal, the inventor would still think of ways he could have done things better and perhaps could have got a better deal. It is important to keep a healthy relationship and contact with the licensee even after reaching a deal. This helps greatly in case of future hiccups in the royalty payments. 

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.
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