Licensing
When an inventor licenses his product, he gives the right to manufacture and
sell the idea to another firm (the licensing firm) and this firm pays the inventor
a royalty on each item that is sold. You should license your product to someone
that is already in business (manufacturer) and who has the financial resources
and proven experience to produce and market the product. However, there are a
lot of sharks out there that can rip-off an inventor. They can sign a licensing
agreement and then do nothing to promote the product and the inventor is stuck.
Or even worse, they can charge the inventor up front fees, and then do nothing.
A good idea in any licensing agreement is to check out the licensing firm very
carefully. Get some references and call them to see how this firm has performed.
Before showing them the product, have them sign a nondisclosure agreement. Also,
have a very good lawyer look at the licensing agreement, as this is the most
important part of the deal.
There are two things that are really critical in regards to the licensing
agreement: the royalty amount and the guarantee of annual sales. The typical
royalty for most of the deals that we have seen varies between 4% and 10% of
sales. Do not be overly concerned with the royalty percentage. Would you rather
have 4% of $10,000,000 or 10% of $100? Be concerned with the total future sales
of the invention. One way to deal with the future sales is to put a minimum guarantee
into the agreement that states that the firm must sell a certain amount in order
to retain the licensing agreement. This is a fairly common provision and one
that can be built into the contract very easily.
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