How to Make Money From Your Invention (Chapter 8) – Further Develop or License Now?

How to Make Money From Your Invention (Chapter 8) - Further Develop or License Now?

1. Royalty Rate vs Stage of Product Development

Another strategy consideration is whether to continue development or license as an embryonic or limited development technology. It will cost you out-of-pocket to continue development yourself but your license will ultimately be more valuable.

Figure 1 illustrates the tradeoff. The curve representing the % of the cost of each stage of new product development to commercialization is based on data obtained from Robert Cooper’s book, Winning at New Products.

The royalty line is the % loss in royalty rates by stage. That is, 100% minus the value shown at any stage. It is an estimate based on the assumption that there is a linear relationship between the stage of development and the potential royalty rate for a license.

In other words, the closer your invention is to an accepted commercial product the lower the risk and the greater the royalty, i.e., the % loss is least. There is data to verify this conclusion, but the linearity of the relationship has not been shown. The royalty curve in Figure 1 is hypothetical. The stages are the same as those discussed earlier (page 2), as the key steps in the innovation process. Stage IV is the development stage and represents one of the major costs in the commercialization process. For example, the royalty in stage VII might be 10%, but only 5% if it were in stage IV and perhaps 1% in stage I.

There is a point where there is a tradeoff between further development and the value of a license. In the example shown, the major costs are in the development and the commercialization stages. Depending on the actual values and the linearity assumption, the best place to offer to license may well be at the end of stage III, where the idea or invention has passed the market, technical and financial assessments. Of course, every situation will be different and you have to determine at what stage of your development is best to attempt to license. It should be noted that the royalty aspect of a license is not the only factor that determines value. We shall discuss other factors that effect the license agreement in The License Agreement section.

Given the answers to these questions and considerations, certain options will emerge that will take you to the next stage. This is to define how to get to the goal you have set regarding the intellectual property and possible financial outcomes.

2. Getting Help

Solution to ProblemWhere do you go for assistance with any licensing questions that you may have? We have provided various contacts for additional information on the topics covered above. In most cases, when you approach a company, who is in business to supply help, they will expect to be reimbursed for their services. If you are in a position to pay for services, you will be well advised to interview several companies or consultants. Just as we covered in the innovation section and elsewhere, doing your homework here will also prove to be valuable.

Make sure the people you work with have some knowledge and experience with the needs you have, in the area you are developing. If you are seeking support in identifying and consummating a license deal, some of these firms will take on the task on a ‘contingency’ basis charging anywhere from 15-50% of any revenue from the completed transaction. This is sometimes useful, especially if one is seeking foreign licensees.

In general, the search for help can also be done using the Internet. A diligent effort will uncover many possible sources and it will be up to you to pick the ones that best match your needs.

Lastly, the Licensing Executives Society can be useful by providing names and references that can be of help to you.

3. Finding a Licensee

Once you have made the decision to license your invention, the next step is to draw up a list of potential licensees. The list should be derived from the knowledge you have gained in understanding the market that can utilize your invention. Potential licensees include those companies that are involved in business. Identify those that are likely users of your technology.

Additional potential licensees can be derived from a citation analysis that you can do. If your patent or patents have been published for two or more years, it is useful to do a citation analysis on them. If your patent has not issued or has only recently issued, you can do a citation analysis on important patents that you have cited in your prior art search. The companies that have cited these patents can be added to your list of potential licensees.

DescriptionBefore approaching anyone with your technology, you need to prepare a non-confidential disclosure that describes, in general terms, what you have invented. This should be written after you have submitted your patent application. The disclosure should be the first document presented to your potential licensees. If there is interest in the technology, the company will likely want more information. This can be provided after an appropriate NDA (Non-disclosure Agreement) is signed by both parties.

Once you have the NDA and a list of potential candidates, you need to identify the right person or group within the company to contact about your technology. This can be difficult to do at some large companies. Any help you can get in this effort from contacts you already have would be useful. If you are a member of a society, such as Licensing Executives Society, the membership lists can be useful in identifying a contact within the company of interest.

Website on ComputerAnother approach to finding a licensee may be to list your invention on web sites that are involved in marketing technology. Depending on the site, there could be some cost to do this and an additional cost if a licensee is obtained through that site. This approach could be used if you have not been successful in finding licensees through direct contacts. Companies can be contacted through internet searches.

Alternatively, you can contract with a consultant who is knowledgeable in the area of your invention. Some consultants will work on consignment, where they will get paid only if successful in licensing the technology. The fee is usually some percentage of the upfront payment and royalties. Others will only work for a base fee plus a smaller percentage of the income. There will also be a question of exclusivity for the consultant. Do you want to allow one approach to licensing or is it better to have multiple approaches? The answer will be dictated by the nature of the invention and your ability to market the technology.

The consultant and web listing approaches can be used successfully but the inventor gives up a significant part of the potential income.

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This information is presented for the general education of independent inventors by the Invention Patenting Group. The Invention Patenting Group makes no warranty, express or implied, or assumes any legal liability or responsibility for the accuracy, completeness, or usefulness of any information, apparatus, product, or process disclosed herein, or represents that its use would not infringe privately owned rights. Reference herein to any specific commercial product, process or service by trade name, trademark, manufacturer or otherwise, does not necessarily constitute or imply its endorsement, recommendation, or favoring by the Invention Patenting Group.

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