by Andrew Armstrong
Once you have your product patented, you may be disconcerted at the thought of manufacturing it yourself. For many entrepreneurs and inventors, mass producing and distributing products simply doesn’t play to their strengths.
Most inventers and many entrepreneurs are not prepared for the ongoing struggles with getting a product to market. These involve finding funding and getting up to speed quickly on the highly complex manufacturing and distribution processes. They also aren’t prepared for the exploitation that is common and how to protect themselves.
The alternative is to license a newly patented product or patented software. This is a common step but little understood by most new to the business world. When an inventor is told that he can make money by licensing their “brain child,” the first reaction is often fear that the ideas will be stolen. Entrepreneurs often worry that the lawyers are going to get all the money.
It’s probable that your skills lie with innovation and invention, not with the more tedious process of producing, marketing and distributing it. Letting an experienced businessperson introduce your product to the marketplace often results in a far higher return on your investment of time and energy. Going it alone often results in losing everything you’ve put your heart and money into.
Once you accept the idea of licensing your product, you need to negotiate an agreement, which is complicated and often a war of nerves. To get the best deal, here are four tips to help you and your licensee hash out the fairest terms possible.
#1. Start from a strong position.
This means getting your idea protected with as many legal constraints as possible, which might include filing an application for a patent, copyright and trademark. You need further protections if someone else will create additional processes that involve your product.
You need to be protected on all levels in order to negotiate from a position of strength. Safeguarding intellectual property is complicated and it requires the work of a professional attorney who is familiar with the process.
#2. Know your objectives.
What do you want to accomplish by licensing your product? The clearer you are about this, the easier it will be to protect yourself and negotiate a satisfactory agreement.
Consider these questions:
- Do you want no more to do with the product, simply collect money?
- Do you want to keep some say in the marketing and the production?
Sort out how involved you want to be after your product is licensed. Then make sure your agreement reflects your needs.
#3. Protect yourself with professionals.
Make sure you put together a team of experienced people who understand the entire licensing process first hand. Typically these subject matter experts might include:
- Business development executive: This is often a CEO or a technology transfer professional from a university who puts the deal together.
- Scientific/Technical expert: This person provides a range of expertise that makes him the go-to person for due diligence research.
- Decision maker: This is the person you trust to commit your team to the deal.
- Licensing attorney: He is both a participant in the negotiations and the person who draws up the legal paperwork.
Every role must be covered, but there can doubling up. For example, a single individual might qualify as both the executive and the scientific or technical expert. Just be sure that each role is thoroughly and competently handled.
#4. Figure out what the licensee will bring to the table.
Most likely you want to license your product because you don’t have the resources and the expertise to bring it to market yourself. That means you want to choose a licensee who is strong where you are weak.
In order to choose the right person to license it, you need to conduct due diligence. Know what their assets are, both in knowledge and resources, their demonstrable strengths in the marketplace and their capabilities based on past performance. Make sure they have what you are missing and will add value to your patent.
An often-cited article from Bioentrepreneur suggests that one should draft a thorough inventory of their position and that of their prospective licensee. Understand your proprietary position, as well as your knowledge of marketing, sales, technical expertise and customer service strengths. Take the same inventory of your licensee. All of this will affect the licensing fee and royalties you negotiate.
Most negotiations include a term sheet listing major points of discussion that both sides refer to before starting the talks. This might include:
- Preliminary ideas about fees and royalties
- Territories in the licensing agreement
- An exact description of the product to be licensed
- Technical data and training needed for development, manufacturing and distribution
- What type of support for sales and service will be set up
- How exclusive the licensing is
- How long the license will last
Successful negotiations depend on being prepared. Do your research ahead of time, especially when it comes to setting up your team. Be clear with yourself how involved you want to be with your product after the license is granted. Choose your licensee carefully and critically. Follow these tips and you will end up with money in hand for your patented product.
Andrew Armstrong is an independent business and market strategies consultant in the San Francisco Bay Area working primarily with technology and start-up phase clients. He founded and ran his own digital marketing agency, KickStart Search, for 6 years prior to being acquired by Los Angeles-based Wpromote in April of 2015. Follow him on Twitter @kickstartseach.