How to License Your Invention to a Manufacturer for Royalties
I had experience licensing my product ideas to companies, and I'll teach you what manufacturers require of you to bring your product idea to market and pay you royalties.
You have two choices:
- You can license your idea to a manufacturer who accepts all the responsibilities involved with bringing it to market.
- Or you can start your own company to do the manufacturing, distribution, and sales.
As you can see, the second choice isn't easy. In this article, I’m going to focus on the first choice—licensing. I’ll explain the following issues you need to know to license your product to a manufacturer that will bring it to market:
- Start With Preliminary Research
- Do The Math
- Protect Your Design Idea Before Pitching It
- A Provisional Patent Application Only Gives You a Year
- Can You Defend Your Idea?
- Prepare for Pitching Your Idea
- Look for Companies Offering Open Innovation
- Understand the Cost Risk of Developing, Distributing, and Selling
- Compare the Pros and Cons with Invention Brokers
- Consider the Alternative
- Royalty Sharing With Idea-Search Companies
Start With Preliminary Research
When you have a product idea, you want to license it to a manufacturer who will pay you royalties, but you'll have to do lots of research first.
First, search the United States Patent and Trademark Office website or Google Patents for all possible matching claims. If you find anything like yours, you may as well stop right there because you’ll never be able to get a manufacturer to license it.
A manufacturer could be sued for infringing on that patent, and you can count on it that they will check on this before signing an agreement with you.
Stopping doesn’t mean failure. It just means that someone beat you to it, and by knowing that you have freed up your time to work on another idea.
Do The Math
Royalties are usually in the range of 5%. When I mention this to people, they say, “That's nothing! Why even bother?” Well, if you license to a company that has the resources to move large quantities, this can add up.
If you manufacture the product on your own and create a company to sell it, your profit might be 40%. However, You’d be working 80 or more hours a week, hiring a staff, dealing with government policies, shipping, invoicing, collections of bad debts, and so on.
Do the math and see how you end up either way: Collecting royalties or doing your own direct sales.
Protect Your Design Idea Before Pitching It
You might think that the first thing you need is a patent to protect your idea. However, you need to consider this: Would you have the money and resources to defend that patent if someone were to steal your idea?
I’m going to tell you two personal stories about my prior experiences to show you what can go wrong.
1. Do a Patent Search Before Filing for a Patent
When I had my first vision for an invention, I hired a patent attorney. He wrote a detailed report describing my idea in legal terms and included an estimate for filing a patent of the claims.
However, I didn't understand in my early years of innovating that my idea was not marketable. My attorney never bothered to tell me that, nor did he even care to analyze that aspect of it.
In all fairness to him, that was not his job. I hired him to get a patent, and that was all he had to do.
Luckily, I discovered that there was no market for it, so I dropped the plan to get a patent. If I had the lawyer continue, he would have charged me for the filing, even if it failed.
2. The Patent Process Has Changed
In the early 1980s, I developed a computer program that made a personal computer into a multi-line phone answering machine. I sold it through magazine ads in trade journals. That’s what got me into business myself. I had many years of success selling it.
However, years later, another company tried to sue me for patent infringement. They came up with an idea for digitizing speech and storing it on the hard drive of a multiprocessing computer with a means of indexing and retrieving the individual voice recordings as data files. They called it Voice Mail, and it was very similar in function to my product.
Fortunately for me, I had been advertising with printed ads in trade magazines. That served as proof that I was selling my product long before they even filed for their patent. When they found that out, they ran for the hills, and I never heard from them again.
If they had pursued their lawsuit, they might have lost their patent. In those days, the United States patent laws protected the first to invent and publicly announce their idea. That's what saved me.
Today things are different. The law changed in the United States on March 26, 2013, so that the first to file is the one who gets the patent protection.
Under the old law, the person who was the first to think of an idea would get patent protection. That has proven to have awkward legal consequences that were difficult to litigate, which is why the law was changed.
Now, since inventors feel they need to rush to get protection, they file for a patent without doing any research to determine if their idea is even marketable! That could turn out to be a waste of money if they can’t negotiate a deal with a manufacturer.
A Provisional Patent Application Only Gives You a Year
A Provisional Patent Application (PPA) puts it on record that you had your idea as of a specific date. That gives you one year of protection, and the PPA filing date is credited to the regular patent when filed within a year.
However, if you leave out any claims of elements of your product, and later include them in the regular patent application, you won't be credited with the earlier filing date of the PPA. Why is this important? Because, as I mentioned earlier, the law was changed to recognize the first to file.
Filing for a PPA has its drawbacks. Once you file, the clock starts ticking. You’ll have to register for a full patent within a year, or you lose your rights. You need to have accomplished finding a licensee within that time, otherwise you have to make a tough decision to spend money for a patent or to drop the issue and move on with another invention.
Can You Defend Your Idea?
Your idea is legally your Intellectual Property, but can you defend it? Do you have the resources to sue infringers?
Let’s say you have a patent on your idea, and some manufacturer infringes on it by making and marketing the product without paying you. If it’s a big corporation, you’re dealing with people who have more money and resources than you do.
Once someone who stole an idea from me said, “You can keep us tied up in court forever. We have the money.” True story. Believe me. It’s a dog-eat-dog world out there.
Most small-time innovators don't have the resources to fight big companies that take your idea and create knock-offs.
If you’re planning to get a patent, first consider how well you would be able to fight anyone in court if you should ever need to. You need the resources to defend your patent. Otherwise, it's useless.
Large manufacturers are better off with patent protection because they have the resources to defend their patents against infringement.
For an individual, it may be a waste of money to get a patent. It could be better to simply protect yourself with a non-disclosure agreement whenever you make a pitch to show your idea to a potential licensee.
Later, when you license your idea to a manufacturer, you can negotiate terms that require them to get the patent and to include your name on it as the inventor.
Prepare for Pitching Your Idea
These are the steps to take before you consider pitching your idea:
- Next, draw up detailed specs to describe your invention. You’ll need well-documented information to present to potential licensees. Drawings and images of a prototype come in handy. It helps if you can build a working prototype to show how it works, but this is not necessary if your specifications and drawings are good enough.
- Create a sell-sheet. That is a one-page description of how your idea benefits the user. It should also include a visual image. Manufacturers like something visual.
- When you’ve done all the prerequisites, you need to follow their rules for submitting ideas. I’ll get into more of that in a moment.
- If you get a request to make a presentation, find out what they want to achieve with the meeting. Do they want you to show your idea? Do they plan to negotiate a deal? Don't be pushy, but inquire what to expect. It will help you prepare. Make sure you know who you will be meeting and what their position is in the company.
Remember that the manufacturer is risking everything.
Look for Companies Offering Open Innovation
Many inventors kill their own deals because they don't appreciate how much the manufacturer is risking.
In various social forums I’m always reading posts about innovators who expect that every company they pitch their product idea to, should recognize their product's potential.
They don’t take into account that these companies are inundated with inventors calling all the time. For this reason, many companies don’t accept open innovation opportunities.
Those that do, have particular methods that one needs to follow to present an idea. That's with either an online form or some other contact method.
It’s helpful to check their website and search for information on “open innovation” to see if they offer that opportunity. At least you’ll know they are the ones who are interested in looking at ideas from outside their company.
Before you choose which companies to contact for a licensing deal, you should research the company's sales potential. If the sales channels are too small, you might be wasting your time because you could be losing out on a decent royalty.
If you do get as far as negotiating, you need to accept an agreement that works for both of you. It needs to benefit the manufacturer more than it serves you.
Too many inventors do not realize this fact of life. Remember that the manufacturer is risking everything.
Understand the Cost Risk of Developing, Distributing, and Selling
The manufacturer needs to build the product, market it, sell it, support it, protect the product by getting a patent, and defend it.
What are your responsibilities? See my point? You are risking nothing. For that matter, many companies don’t want to deal with you after finalizing a deal.
They’ll send you your royalty checks, but they don’t want to hear from you. That’s because many inventors bother them with other ideas or improvements they think of later. You can count on it that the manufacturer has already figured out some upgrades. They have the staff and the resources to do that.
Unfortunately, it's tough to get through the front door when you’re doing this on your own because so many other inventors already have left a bad impression.
Always remember that the manufacturer is risking everything, and you can’t expect them to see things your way. The sooner you accept that and go along with their terms as long as they are reasonable, the better off you’ll be.
Compare the Pros and Cons with Invention Brokers
Some inventors go to consultants and brokers to do all this for them. However, you need to be aware that there's a catch.
Most brokers and consultants specializing in helping inventors will charge a fee to review your idea. Then they charge for creating a written presentation to show potential licensees. If you don’t have a sample, they will charge you to create one. They will also charge you for applying for a patent.
After all that, you don’t even know if the product will sell.
Consider the Alternative
When I first started with my company in 1982, I created several software programs for personal computers that I successfully licensed to companies such as Sony, Digital Research, and Dialogic.
I learned from my trial and error the method of finding licensees, getting them interested in my products, negotiating royalties, and even dealing with plagiarism.
Fast forward to today: I am now retired and still have the drive to invent new things. Only this time it’s not related to computer software, but rather miscellaneous products for home and personal use.
What I don’t have anymore is the energy or the desire to get involved with building a working version of my ideas, running around nationwide to talk with potential licensees, and dealing with the legal aspects of it all. I’m done with that.
I’d rather work with someone who can do all the research and heavy lifting to make my ideas into reality and get them marketed by the right companies to make it all worthwhile. In return, I’m willing to share the royalties.
Royalty Sharing With Idea-Search Companies
Are you prepared to do everything I mentioned on your own? There are two alternatives, but they require sharing the royalties.
I’ve done my research, and I can recommend two professional companies that help find manufacturing licensees:
- InventRight is a company that functions as a mentor to guide you along the way, but you still do all the work.
- Edison Nation accepts most any idea in any form (even a drawing on a napkin, although I don’t recommend that), and they do all the heavy lifting for you.
InventRight’s co-founder is Stephen Key, who wrote “One Simple Idea,” a book explaining how to get your idea out there. Stephen Key is an experienced innovator. He has invented many products that he has successfully licensed and is selling on the market.
Stephen and co-founder Andrew Krauss will help you at every step. When you contact them (via their website), they will discuss your needs, what they will do for you, and the cost for the service.
They teach you how to do all the things I just mentioned above, but you will end up doing it right, thanks to their proven knowledge and expertise. It’s worth paying to be mentored along the way as long as you are willing to do all the hard work yourself.
Once they guide you with one invention, you’ll know how to do it yourself for your next bright idea.
InventRight does not take part of the royalty. You keep the entire revenue from your successful inventions.
Edison Nation has all the resources to do a patent search, build a prototype, test your idea, and negotiate with licensees to get you the best deal.
They do all that at their expense, less a $25 fee you pay for submitting your idea. When they succeed at bringing your product to market through a manufacturer, they share the royalties with you 50/50.
I elaborate on their entire process in another article: “How to Sell Your Invention Ideas to a Manufacturer for Money.”
I'm not an attorney and I do not offer any legal advice. This article is for informational purposes only. You should contact a patent attorney if you have any concerns.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
© 2017 Glenn Stok