Licensing involves granting another company the right to exploit an invention, whether it’s an idea, image, concept, work of art, product or service. In exchange, the licensee pays the licensor royalties for the right to make, distribute, market, use and/or sell the product. This business arrangement allows you to license copyrights, designs, intellectual property and other services for a specified period of time or amount.
For many, licensing can be a profitable avenue for growing a business while leveraging existing production, distribution and marketing products of more established companies. As a licensor, you can choose to be exclusive (only one manufacturer is licensed to produce your product or service, or only one firm can leverage your designs), which often means the licensee should purchase the intellectual property outright. You can also opt for a non-exclusive agreement (numerous businesses are licensed to produce the product or creation), which allows the licensee to sell your invention to competitors.
Getting a Licensing Agreement
Let’s say you have an idea for a product or service, and you’re looking to secure a product licensing deal with an existing company that has the resources needed to get your idea, product or service to market. Or maybe you’ve created an amazing product (such as beautiful graphics and photos) that you believe companies will be willing to pay money to use. Next, you’ll need to follow certain best practices during your search to find a company willing to license your invention and pay royalties on the revenue generated.
Be an Expert
You must not only know your product inside and out, but also be an expert in your particular field or industry. If you already have a product, it should be extremely high quality. If you’re looking to license an idea to a company that will build a product for you, make sure that your prototypes are outstanding. Know who the small and large competitors are in your sector, as well as the potential market size for your product or service. You should also have a good idea on projected consumer demand for your product and how it will meet the needs of your target market.
Compose a realistic analysis on the risks of licensing your product. While you should be passionate about the prospects of your invention, be open about the potential for product failure or slow customer adoption. Also consider how sharing your product or intellectual property may dilute your invention’s worth and originality over time.
Work Closely with Your Patent Attorney
If you’re planning to pitch a physical product you’d like to license to a larger manufacturer, your patent attorney will help you collect any and all material needed to present a winning proposal to potential licensees. Ask your attorney for a letter detailing the patent search results and for expert opinions relating to the extent and value of the patent coverage.
Include items such as product drawings, prototypes and specifications to demonstrate how the product or service will appear and function. This should be added to your presentation along with cost estimates and testimonials proving your invention’s potential value to the marketplace.
Before submitting your proposal to a potential licensee, consult your patent attorney to ensure your intellectual property is adequately protected. Having a confidentiality agreement and IP protections in place will avoid future lawsuits and legal headaches.
Leverage Licensee Resources
If your licensee is a corporation, they likely already have a process in place to handle license submissions. Check to see if there’s a licensing office that can jumpstart your case file and advise you on the company’s confidentiality procedures.
Moreover, identify an individual on the licensee’s team who will support and promote your ideas to the rest of the company. Your “champion,” the person who takes a significant interest in your idea, will give your invention more credibility as you build a case for licensing.
For Copyrighted Works
If you are looking to license your copyrighted work, whether it’s photos, art, music, sound clips, illustrations, video clips, written works, choreography or designs that you have created and copyrighted, you can sell them through stock media sites (see a full guide here) or develop an individual relationship with a particular client who wants exclusive rights to your work.
Getting Paid: Royalties
When you license a product, service or intellectual property, you retain exclusive rights, either through copyright or design patent, to the product. By licensing the intellectual property to an individual or existing company, you agree to receive a royalty fee (i.e. a percentage of the revenue from the licensed items sold, or a one-time payment for use).
Licensing fees and royalties vary depending on the type of product and the potential risks each party faces by entering the agreement. Likewise, your goal should be to eliminate as much risk associated with the agreement to create more value for the licensee and a higher rate of return. Other factors that influence royalty rates include:
- Your industry
- The rights on the intellectual property
- The nature of the intellectual property
- The strength of protection
- Exclusivity rights
- The level of additional profits or cost savings
You should also consider internal and external environmental factors when determining the royalty rate for your licensing agreement. For example:
- The amount invested into product or service development (and how to get a significant return on that investment)
- Industry competition (and how much others are asking)
- The option to sublicense, which allows the licensee to grant licensed rights to a third party
- Whether or not there are high barriers to entry in your market (these range from internal capabilities to economic and market conditions)
- Government regulations
- The risk of counterfeiting
- The risk of technological obsolescence (i.e. when your invention still works but is no longer in demand)
According to WJB Chiltern PLC, licensing royalty rates range anywhere from 2 percent to as high as 17 percent depending on the aforementioned factors. You can also choose to set up your royalties so they’re based off a descending or ascending percentage when certain sales targets are reached, or you can simply attach a one-time flat fee. Other structures base the percentage on gross sales (before taxes and discounts) or the wholesale price of the product. Rather than a royalty fee, some licensors agree on receiving a non-monetary payment, such as free publicity or a donation to charity.
Licensing Intellectual Property for Your Invention
The widespread use of file sharing and open-source content has caused concerns around intellectual property rights. For inventors who want to license a patent to a company, it’s essential to perform due diligence in the early stages of the product development process.
Before you develop an idea, product or service, make sure that it’s not already patented or copyrighted. For patents, consider hiring a professional patent attorney to do a full patent search, since it will likely involve potentially hundreds or even thousands of similar patents. It’s important that you don’t license a patent that already belongs to someone else, or you could be responsible for an even larger amount of damages.
Settling on an arrangement that works for you and the licensee, and honoring the terms of that agreement throughout your invention’s life, will prevent disagreements and a lengthy legal battle in the long run.