5 Licensing Lessons Every Inventor Should Understand

by Dave Clarke on May 22, 2014
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Americans have long admired inventors, those gadgeteers intent on thinking up the next big thing. From Ben Franklin, who tinkered with eyeglasses to create bifocals to Fulton’s steam engine, Bell’s telephone and Edison’s light bulbs, the notion of building a better mousetrap is right up there with baseball, apple pie, and Mom.

But how do you break through so customers will beat a path to buy your product? For many, the answer lies in licensing their product — giving others who have either the expertise in new product launches, the connections to get retailers’ attention, or both, the rights to manufacture and market their “baby” in exchange for paying them royalties on every sale.

The International Licensing Industry Merchandiser’s Association (LIMA) says licensed products accounted for about $112 billion in retail sales in 2013. That’s a lot of Slip ‘N Slides and Super Soakers.

Whether your product is a toy or a breakthrough medical device, to get it to market via others’ efforts you’ll have to navigate the complex world of licensing. Here are some pointers:

1. Expect to give away most of the farm. Consider yourself lucky if your licensing deal gives you 5 percent of the sales in royalties. Try to get a minimum guarantee: an amount you will get whether your licensee succeeds or fails with your product. “Royalties are driven by many factors, including the strength of the IP and the market segment,” says Soody Tronson, founder and principal of Soody Tronson Law Group, a Silicon Valley firm that specializes in intellectual property.

In the consumer goods industry, she explains, royalties can range between 4 percent and 12 percent with higher rates paid to health and beauty aid products than, say, food products, which are typically between 4 percent and 5 percent. Commodity items tend to earn a relatively low royalty rate (about 3 percent) with consumer goods yielding around 5 percent. Software may earn about 7 percent to 8 percent. Celebrities who license their name for goods can earn royalties in the double digits. Rates in clothing and toys/games may range from 12 percent to 15 percent.

2. A small percentage of something big is better than 100 percent of nothing. You can grow old and weary trying to convince a major retailer like Wal-Mart they need what you have. But the right licensee, who has the right connections and the right experience, might be able to secure you prime retail real estate in as little as 90 days. And, they shoulder the burden and costs of manufacturing. Even a 5 percent cut can add up.

3. Choose your licensee and terms carefully. And remember that even if you do find a compatible licensee with the right experience, the right contacts, an organization you feel comfortable working with, and an understanding of your product, failure is still very much a possibility.

You will primarily be choosing between whether to license or assign your rights. You can equate a license to a lease and an assignment to a sale,” Tronson explains. “The former can be terminated if certain conditions are not met during the term of the license.”

Which to choose depends on many factors, but, in short, if you want to sell and be done with your intellectual property, then you’d assign it and receive payment. If you want compensation to be driven by certain conditions over a period of time (such as product sales), you would license your IP. There are also tax implications to consider for both routes.

4. Hitch your wagon to someone else’s star. To succeed, you will need to understand your product and market sector inside and out. If there’s an established player with brand-name recognition, such as a sports team, university, or beloved fictional character, that can serve as a real jumpstart for your product, find ways to connect with them. After struggling to get shelf space for his product, a BPA-free sports bottle, Jim McFarland’s company, FLEXR, managed to meet a licensing company at a trade show that opened up doors — and garnered shelf space — at two major college campuses. A distribution deal may have his bottles on shelves at 4,000 college campus stores by the end of the year. Attend trade shows, contact LIMA, query intellectual property lawyers, ask store managers for referrals; put yourself in a position to make the connections you will likely need to break down retail or wholesale distribution barriers.

It’s a Jungle Out There

Take all the necessary precautions to protect your property lest someone try to steal it. Put patents in place, register trademarks, get the advice of a reputable attorney with experience in licensing, and proceed with caution. “The relationship [with your attorney] is a very personal one,” Tronson says. She suggests you look for “chemistry” before signing on with someone. Although legal documents can be dense and complex, your attorney should be able to explain the various scenarios to you in terms that you can understand.

When it comes to transactional law,” Tronson advises, “you are choosing a person and not just a firm so make sure it is the person that you evaluate.”

Bringing a new product to market, whether you license it or not, is not for the faint-hearted. Be prepared for rejection. About 90 percent of inventions never make it to market or fail once they do. Still, success with a product that fills a specific market need and earns its creator fame and fortune is part of the American dream. Good luck!

Dave Clarke is a business writer for Intuit and is passionate about solving small business problems.

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