Reading: Licensing as Part of the Plan

Licensing as Part of the Plan

Consider licensing
Let’s say you have a promising venture idea but find yourself without the funds or experience to produce and commercialize the product or service. You have the option of licensing the patent rights for your intellectual property to a company rather than starting your own business. A license is a formal agreement made between an inventor (the licensor) and a company (the licensee). The inventor gives a company certain rights to produce, market, sell and/or use his or her invention or idea in exchange for either royalties from product sales or a fixed payment.

Sometimes it makes more sense to license a product to a company that already makes similar products. Let’s say, for example, you’ve perfected the design for a dusting apparatus that can reach into tight spaces without knocking things over. If you can market your idea to a well-known company that already makes small household cleaning devices, you might do better than if you launch a whole new enterprise revolving around your duster. If the invention succeeds in the marketplace, and if you have a well-structured licensing agreement, licensing can be very profitable.

If you think licensing is right for you, include your licensing strategy in your business plan.

Advantages of licensing
Both starting a company and manufacturing a product involve a great deal of time, money, responsibility, and risk. By licensing your venture idea you transfer all of those responsibilities and risks to someone else. Licensing is ideal for the person or team that wants to keep inventing rather than starting and running a company. By choosing to license, you also have the advantage of presenting your venture ideas to well-established companies that are set up to manufacture and market products similar to yours; such compatibility can increase your chances for success in the market.

What a license looks like
A license agreement usually describes in detail what is being licensed and the circumstances in which the licensee can use the technology. The latter includes the kind of license it will be. In exclusive licenses, only one licensee can use the technology under a specific set of conditions (this also excludes the owner of the technology from using it within the specific conditions of the license). In partially exclusive licenses, either the total number of permitted licensees is spelled out or the exclusivity ends after a certain specified time period. A non-exclusive license means you may license your technology to an unlimited number of licensees at any time. Exclusive licenses are generally more expensive than the other types (higher up front payments, royalty rates, minimums, etc.).

Aside from deciding the exclusivity of the license, you can also spell out the specific activities the licensee may engage in. They may only be licensed to manufacture or sell the product, or both; perhaps the licensee may only conduct additional product development. Also, you can construct the license for specific circumstances; for example, the licensee may only distribute the product in three distinct geographic regions, may only use it for medical purposes, may only use it in certain industries or in certain products, etc. The license agreement should spell out whether or not the licensee has the right to sub-license the technology to others, and if so, under what circumstances.

Negotiate the terms of your license carefully. Don’t “give away the store” by granting an exclusive worldwide license for all uses with low minimum payments, rather than a number of non-exclusive licenses for individual uses at reasonable minimums for each. At the same time, don’t place undue limits on the licensee, as it could become impossible for your product to be profitable.

Finding the right company or companies
Do some research to determine what companies can best produce, market and sell your product or service. First, identify companies that have products similar to those you are proposing. Eliminate companies where your product would compete with any of the products the company is already producing. Go to the library and consult the Thomas Registrar of American Manufacturers, trade journals, Standard Rates and Data, and/or the Dun & Bradstreet Million Dollar Database.

Now figure out which companies would be most interested in your product and can produce and sell it most efficiently. Check the company’s position on the Fortune 500 list of the most successful businesses in the United States and check its ranking on the Standard and Poors listing. This type of research is essential for finding reputable companies that have the technology to both produce and sell your product.

Defining your property
Before you can negotiate the terms of your licensing contract, precisely define the intellectual property you are licensing. See the sidebar on the right for important questions to ask when laying out your definitions.