One or more companies enter into a licensing agreement with you that allows them to use your IP in return for payment to you. This payment normally takes the form of royalties paid at agreed, regular intervals for the duration of the agreement.
The exact terms of the licence must be negotiated in a process that can be lengthy (often many months) and complex. The licence is a binding legal document, so it is usually essential to involve patent attorneys and other legal professionals.
Broadly, a licence:
- Benefits you by making the licensee reward you for the use of your IP.
- Benefits the licensee by giving them a product or technology advantage over competitors.
- Allows you or the licensee (depending on the terms of the licence) to take legal action against others who steal or copy the idea.
For many inventors, licensing is the best way to benefit from an invention. The main reasons are:
- The licensee bears the costs and risks of production and marketing.
- Only established companies may have the resources to exploit an idea with major potential.
- Licensing can provide the inventor with an income over many years for relatively little effort.
Some inventors - mostly in high technology fields - set up companies solely to license out their IP and monitor the progress of their licensing agreements. This is a possible option if you want to start your own business but do not want it to grow too large.
Types of invention that may be better licensed include:
- Components that many companies depend on, such as the drinks can ring-pull.
- Accessories or peripherals dependent on a specific existing product. These may have little future unless licensed to the company controlling the host product.
- Products with high set-up costs.
However, only the strongest forms of IP will interest potential licensees. In most cases this means a patent. If your idea cannot be patented, or if the claims you are allowed are not very strong, few companies are likely to want a licence from you. Even if they are interested, they may not want to pay much for the licence.
Business start-up may be your first choice if you have ambitions to be an entrepreneur, or it may be an option that you have to consider if you cannot interest any companies in a licensing agreement.
It may also be worth considering as a way of persuading companies to take a licence from you. Proving that your product really does sell - even if only over a short period in a small market - may make them show much more interest in it.
Types of invention that may succeed as business start-ups include:
- Products in knowledge-based industries - for example information technology or high-value medical technology - where small companies can thrive.
- Cheap-to-make products which depend primarily on marketing.
- Products that cannot be patented strongly.
- Products that do not have enough profit potential to interest larger companies.
Starting a business is not for everyone. However, experience suggests that inventors who become entrepreneurs tend to be more likely to succeed than those who rely on finding licensees.
An alternative to starting your own business is another form of entrepreneurship: a joint venture with a company - or an individual, or perhaps a university - whose expertise and resources you need. For example, your joint venture partner could be a company willing to help you to develop your idea further in order to give them a better idea of its potential.
Such a joint venture is perhaps best viewed as an experiment that may or may not succeed. You should therefore not expect to make a profit from it. If successful, it could result in a licensing agreement, a spin-off company or some other form of more permanent business relationship.
t is possible that a company may offer to buy the IP in your invention for a fixed sum. In the case of an invention with good market potential, it might be wiser to refuse. But a sale may be worth considering if your idea is of relatively low or short-term value, both to the company and you. The company benefits by not being tied for years to a licensing agreement. You benefit from (a) a cash windfall and (b) freedom from all responsibilities and expenses of ownership of the idea, which may include the maintenance of patents.
Much, of course, depends on the size of the sum offered. You should seek professional advice on a realistic valuation of your idea, but for both sides it will always be something of a gamble. You may regret it if the product goes on to make unexpectedly large profits. The company may regret it if the product fails to sell.
Invention promotion companies
Some companies would like you to think that there is a fifth option - paying them to market your idea. Be very cautious about dealing with any such company.
Invention promotion companies tend to operate in broadly the same way.
- They will offer to give you an opinion of the market prospects of your idea, for a fee of typically a few hundred euros.
- They will usually send you a highly favourable report, with little or no mention of prior art. (It is not in their interests to tell you about prior art!)
- They will then tell you that for a fee of several thousand euros, they can help you market your idea.
- In many cases, their ‘help' amounts to little more than a supply of stationery and a list of company addresses. You have to contact the companies yourself.
- Often the invention promoter will be based in a different country from you, making it difficult for you to seek compensation.
These companies are not necessarily operating fraudulently. Often their terms and conditions are cleverly written to keep them on the right side of the law. Pressure from governments occasionally forces individual companies to close down, but it is usually only a matter of time before others take their place.
Untrustworthy invention promotion companies only thrive because of the gullibility of some inventors, so you must be suspicious of anyone who praises your invention and offers to market it at your expense. (It may be instructive to search the internet for their business name, or use search terms such as ‘invention fraud', ‘invention promoter', ‘invention broker', ‘invention company' etc. You might also ask your local trading standards department for advice.) As a general rule, walk away from any company that wants your money but shares none of the risk.
While legitimate companies may also charge a fee for assessing your idea, they should not demand any further large fees. They will reject the majority of ideas offered to them, wanting to take a risk on only a few of the ideas they see each year. If they genuinely think your invention has good prospects, a more ethical practice is to ask for an agreement with you which entitles them to a share of future profits. In other words, they will get their reward from sales of the invention, not from you.
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