Licensing an invention is about profiting while minimizing the personal risk and commitment. While there is less risk for the inventor, there are a few trade-offs you make when you decide to license.
1. You’ll Only Receive Royalties
In exchange for the rights to produce your intellectual property, the licensee will pay you a share of the revenue collected. Typically, inventors will see a 2-5% share in royalties but this number can increase or decrease based on the market size, expected margins, costs to develop and strength of the intellectual property. Assume you’ve created a new toy that sells in stores for $10. The manufacturer sold the toy to the store for $5 per unit. If your royalty was only 5%, you would receive 25 cents per unit. While it’s not a lot of money, you didn’t have to invest the same time and money the manufacturer did to make the product possible. It turns into a passive kind of income.
Royalties may only be paid out every quarter, depending on the company. While this sounds like a short amount of time, there could be a catch: you may not be cut a check until the quarter following the product sales (if anything sells).
For people who choose to manufacture themselves, the profit can be much higher and the payday a little quicker.
2. You Lose Control of the Product
If you have ideas about packaging, distribution, marketing, cost, production and sales, you shouldn’t license. When you decide to license, the licensee could possibly have complete control over the product. If the company wants to brand your product, you could have no say in it– even if the brand is the opposite of what you have in mind.
3. You Risk Loss of Your Intellectual Property
By exposing your intellectual property for someone else to manufacture, you take a huge risk your intellectual property will be stolen or pirated. Policing a licensee’s use of the IP to make sure they don’t infringe on your rights can be costly and time consuming, even if you have good legal representation. The company might also decide to license your product but never put it into production. This will tie up your intellectual property and keep you from producing it with other licensees or on your own for the entirety of your contract. Within that time, there’s the possibility someone can produce something that fills a similar niche and solves similar problems as your invention.
You could also be giving your competitors the right to use the same production process you use. The licensee will now be on a level playing field with your product.
4. You’re Entirely Dependent on the Licensee
The licensing process is usually limited and, if you’re wanting to continue production with the same company, you will have to re-negotiate the terms of the contract. Depending on how the product did, the interest in the product, new market observations and other factors, the contract and your cut could be changed.
The licensee could refuse to validate or let you audit their royalty statements to determine accuracy. Legal action can be taken but it would get very expensive very fast.
Although licensing can save time and headaches down the road, the deals can be complicated. If you go the licensing route, be prepared to budget for a top-notch attorney to help you navigate the murky licensing agreements so you don’t fall into any traps.
Would you rather keep control of your product?
At Alotech, we partner with you to find creative ways to manufacture your product while keeping you in control. If you’re looking for a manufacturing partner that listens to you, give Alotech a call! Because we work with inventors with a range of products and needs, we have the resources and knowledge to help you be successful. Contact us today by calling 919-842-3599, or visit our contact page and fill out the form.