You’ve got a great idea.
You’ve actually had it for a while. You know you don’t have the time or the money to bring it to life yourself, but you’d love to see it on store shelves. What should you do? You may have heard that Licensing is an option, but you’re new to this…
What the heck IS licensing and how does it work? Let us explain.
Licensing is defined as: permitting the use of something or allowing an activity to take place.
There are several different types of licensing: patent licensing, brand licensing, media licensing, trademark licensing and more. In this InvENting 101 post, we’re going to focus on patent licensing.
Patent licensing is when a party licenses the intellectual property associated with their idea to another company to manufacture and distribute within a defined market area or category.
Intellectual property is a work or invention that is the result of creativity, such as a manuscript or design, to which one has rights and for which one may apply for a patent, copyright, trademark, etc.
Why on Earth would a company look outside it’s own research and development department for new products?
In today’s retail world, immediate satisfaction is key.
People are looking for immediate gratification in all aspects of their shopping experience from the ease of finding a product, purchasing that product and obtaining it either in-store or almost instantly via delivery. On top of that, there always seems to be something bigger, better and faster out there. Consumer need and rapid pace of change require companies to constantly add new products to their lines to stay fresh and relevant. That being said, many companies do not have the internal skills, time or funds to develop their own new products.
Alternatively, many companies, particularly those in consumer goods, are embracing the trend of “open innovation” – outsourcing research or technology to a worldwide pool of academics, scientists, tech companies and innovators. Tapping external resources alleviates pressure on tight R&D budgets and gets products on shelves faster. It also gives companies new insights on trends, oftentimes directly from their their consumers.
How do you get started?
As an innovator, you have options. You can opt to embark on your own, pitching your ideas to prospective companies or your can partner with a company who will leverage their contacts pitching on your behalf. The choice is yours and depends on your level of comfort and the amount of time and effort you’re looking to allocate to licensing your product.
No matter the path you take, ensure you’re prepared:
- Have a clear description or, even better, a sell sheet outlining your idea.
- Have knowledge of potential competitors of your product and be prepared to explain why your product is more innovative and unique.
- Research, research, research – this can include researching prospective companies and contacts to pitch OR doing your due diligence on the company you’re partnering with to license the idea on your behalf.
What are the basics of the licensing process?
While some nuances are different depending on the licensing path pursued, regardless of who is pitching a product, the main steps of the licensing process are the same:
- A product idea exists.
- The idea is evaluated for strength of commercialization.
- Pitching materials are created around that product idea for evaluation.
- A thorough analysis is performed to identify potential partners in the space.
- Points of contact are identified from potential partner companies.
- Pitching materials are presented to partners for consideration.
- Follow-up is performed, if necessary, to obtain feedback and/or interest on the product.
- Ideally, one of the partner companies will show interest and request a term sheet.
A Term Sheet is a bullet-point document outlining the material terms and conditions of a business agreement.
- Once there is a mutual agreement of terms, a formal license agreement is drafted and signed by both parties.
- Typically, the license agreement will cover the following:
- Subject Matter of the Agreement: May be (1) patent, (2) copyright, (3) trademark, (4) industrial design, (5) trade secret (know-how, technology, experience, etc.)
- Granting of Rights: What the licensor is transferring to licensee
- Licensor’s Obligation: How the transfer is to take place in terms of assistance, support, training and cooperation
- Licensee’s Obligation: Financial requirements, guarantees of licensee, secrecy, costs, etc.
- License Fee: Fee paid to licensor on signing agreement
- Royalty: Ongoing share of proceeds paid to licensor for the rights. May be a lump sum, or percentage of proceeds or amount per unit sold, etc., usually a minimum royalty is required.
- Term: Duration of the agreement (for patent licenses, this is usually the life of the patent)
- Designated Area and Exclusivity: Defined manufacturing and marketing area of license
- Termination: Rights of both licensor and licensee to terminate the agreement
- Guarantees: These can include time to market, annual minimums and more.
- Typically, the license agreement will cover the following:
- Once the agreement is executed, the Licensee, the company who is licensing your intellectual property rights, will begin their development process for your idea.
- Regular updates are provided during the production process.
- Once the product hits store shelves, you’ll start earning royalties on sales of your product in accordance to the terms outlined within the license agreement.
At Edison Nation, it’s our goal to provide our members with the most opportunities for commercialization for their products. As a company, each and every day, we represent the interests of our members. We are their ADVOCATES. We SHARE the passion they have for their ideas handling them with the utmost care. We strive to secure the most lucrative, fair and successful deals for their ideas and do not have success unless they do.
Simultaneously, Edison Nation provides a community for our members to share ideas, find support and resources to continue to grow as innovators. We love to celebrate innovator success, whether that is through their own efforts or utilizing our process.
We hope this article helped you gain a stronger understanding of the licensing process and look forward to reviewing your next idea soon!