AB 02082008 Podcast Interview Stephen Key 96 kbps (AllBusiness.com’s Chris Bjorklund interviews Stephen Key.)

Chris Bjorklund: You’re listening to the AllBusiness podcast. I’m Chris Bjorklund. If you’re getting this through iTunes and RSS feed or an online streaming-media player, you can hear interviews with other experts at AllBusiness.com.

Bjorklund: When you’re trying to bring a new product to market, you’re going to get a lot of rejections. But what if someone’s interested in your idea? What do you do next? We’ll find out from Stephen Key, an expert product developer who teaches others how to sell their ideas through his company, inventRight. You are a product developer, an inventor, Steven, can you tell me what it feels like to get that first call back from a manufacturer, just a little nibble?

Stephen Key: Well, you’re excited, number one. And to get that call, you’re waiting by the phone and you shouldn’t be waiting by the phone but you are. So when you do get that call, it’s exciting. But I think what inventors need to do is just slow down a little bit, take it one step at a time and be prepared for that call. Because when it does come in, they’re going to ask you a couple of questions. And the first one they’re going to ask is, “What do you want?” And you need to be prepared for that question. And what you do to prepare for that is basically try to understand their business a little bit, do some homework, try to understand their strengths and their weaknesses. Understand their business. So when they do ask you, they’ll say, “Gee, Steve, what do you want? What are you looking for?” What I like to do is put it back on them. I like to say, “What are you looking for? Let me understand your business. Do you want an exclusive? What type of distribution channels do you sell in?” Such as, is it mass, is it small retail environment? You need to understand what their goals are in order to answer that question correctly.

Bjorklund: I think if you’re a wannabe inventor, you’ve just had so many rejections along the way.

Key: Yes.

Bjorklund: And so when the positive call comes, I think you’re probably kind of stunned and amazed and really scared.

Key: Well, if you’ve done some good information, you’re never prepared for that call. All right, let’s back up a little bit. You’re never prepared. So when it does come in, yes, you’re excited and you want them to say, “Look, we love your idea. We’re going to pay you lots of money.” But it’s just the beginning of the process so you need to realize to negotiate these contracts and working with these companies is going to take some time. And so what I like for people to do is understand like just slow it down a little bit, ask them about their business so you can understand it. So when they do ask that question, and you have that information a little bit later, you can come back with a proposal or a royalty rate that’s appropriate.

Bjorklund: Now, I was reading the paper the other day about an inventor who was really obsessed with creating pancake batter in a spray bottle and he was getting rejection after rejection and he went on to YouTube and made a homemade commercial showing how you basically--like that Cheez Whiz that you spray out of a bottle. It’s pancake batter.

Key: All right.

Bjorklund: So he makes a homemade commercial, puts it on YouTube and now, I mean according to the story, besides the fact that he’s gotten financing, Costco is going to start carrying his product.

Key: Well, you hear about those stories and it does take a lot of persistence and you’re going to get a lot of rejection and I think what’s important is when you do get rejected from a company, if you can ask them why. Try to gather some good information.

Bjorklund: That’s a great idea.

Key: Yeah, you know, sometimes you’re just emotionally, you’re just upset. But if you just stop for a minute and say, “Look, let me understand why it’s not going to work for your company.” Maybe you can come back, redesign, and resubmit it again. And you’re going to get a few rejections. That’s just normal so be prepared. It’s hard. You know, it’s going to be--you have to have some really thick skin for this business. But what I’d like to do is that I’ll submit my product to numerous companies so I have a lot of balls up in the air and so hopefully I find the right company that is the right fit. And I think that’s the toughest part. It’s finding if you’re selling apples, find a company that’s buying apples.

Bjorklund: Do you try to make friends with the people that are at the decision level? I mean, I know you probably have to make friends with the gatekeeper at the outset who the person who screens the calls.

Key: You know, a lot of inventors, what they want to do is they want to reach someone at the very highest level of a company like a president or vice-president. But I found that if you look for the marketing manager or someone in sales who’s a little bit, you know, a little bit lower down on that chain of command, that if they like your idea, they can champion your idea and if you can find someone in that company that maybe they’ll get promoted. So you know, shoot a little bit lower, find that person that loves it, that can own it, and if they can, maybe they’ll help you bring it to market. Find that friend.

Bjorklund: Now getting back to the company, the big company that shows interest in you, can you find a number of ways to protect yourself when you start the negotiating process?

Key: Well, hopefully, at the very beginning, you’ve done a few basic things. Number one, you’ve done--you’ve written down when you invented your idea in an inventor’s journal, which is really a notebook where you do not tear the pages out easily and you don’t want to skip pages and make sure you do it in ink and have someone you know, sign it, that they witness, that they understand what they’ve just read. That’s the first step for every--anybody with an idea. It’s called an inventor’s journal. And it doesn’t have to be expensive. You could pick it up at a drugstore. But that’s the first step and that is really very important. Because in this country, it’s not first to file a patent but it’s first to invent. So that’s the first step.

Bjorklund: So what kinds of things would you say in there? Can you give an example of what you’ve written in one of your journals?

Key: Sure, you would write, “Well, gee, on this date, I invented this rotating label that adds 75 percent more space to a container and this is how I think it could be made.” Just your thoughts and keep that journal, keep on writing in it. That will be a document that if you ever, hopefully, you never get in court that they’ll ask for that document. And I have been to federal court so I know they do ask for that personally so--but the next thing that you need to do before you start calling these companies is understand that you’re going to need some protection especially if you have a big idea. And there’s ways that you can do this. It could be a copyright; it could be a trademark but usually a patent that you’re going to need to apply for. And for the inventors that are starting out, that are on a budget, there’s a great tool and the tool is a provisional patent application. It’s a little bit over a hundred dollars. You can actually do it yourself. If you’re not comfortable with doing it yourself, there’s books on it like David Pressman’s Patent Yourself in 24 Hours. You can also hire a patent agent. You can hire a patent attorney. But you need to understand about protection, about patents so read as much as you can up on the subject and then, if you need to, call an attorney.

Bjorklund: Now, I would imagine when you start talking to the company, they might use language that I’m not really familiar with such as minimum guarantees. Now what’s that?

Key: Well, they’re probably--well, that’s a tool that every inventor should understand. They probably won’t mention that to you but what I would recommend is certain terms in the licensing agreement. But before the licensing agreement, let’s back up for just a minute. What usually happens is that a company will call and say, “We’re interested in your idea.” Then you’re going to ask them about their business a little bit so you can understand what type of sales forecasting, what type of numbers they can give you so you can come back with the correct royalty rate. So this is what I do. I’ll say, “Look, if you can give us some numbers in sales, I’ll come back with the appropriate royalty rate if I understand your business.” But you also want to talk about some other things as well. You want to understand their business, where it will be sold, what channels of distribution, what type of territory. Is it going to be in the United States, Canada, Mexico, or the world? You want to understand a little bit about their business so you can put together a term sheet. And a term sheet is this whole process is a slow dance. And you don’t want to step on anybody’s toes and you want everybody to be excited about going forward so you start with the term sheet. So these are your wants and what they want and see if you can agree to a one-page term sheet. How are we going to work together? And that’s really the first step and that might take a month. That might take a couple of weeks.

Bjorklund: Is there a template for that or you just really create it yourself?

Key: You have to understand some of the business. What do you want from the deal? And so, you need to understand--at the end of the day, you want royalties of course, because we are talking about licensing, which is basically you’re renting your ideas to a company and they’re going to pay you a royalty on every wholesale price and so, if you understand that basic term of just royalties, that’s what that term sheet’s going to say, “Gee, I want to like to see a 5 percent royalty.” And that’s, I would say, probably the average. You might want to ask for a little bit higher royalty and then come back down so they feel like they’ve gotten a good deal. But what I’ve learned, you know, 10 percent is usually a little high, 1 percent is a little low. It’s all going to be determined on how many they’re going to sell it at the end of the day, of what is an appropriate royalty rate. Everybody has a different figure in mind of what they would like to receive, of course. But you have to look at it from both parties to make a really good deal. So you start with the term sheet, start with royalty rates, and what I, you know, a lot of inventors think that the royalty rates are the most important part of these contracts. It’s not, Chris. What’s important are the minimum guarantees. And they’re not going to just offer that to you. Minimum guarantees is a great tool for inventors. It actually takes away some of the risk that’s involved and some of these companies, you know, it’s all about risk. How many money are they going to spend because it’s a new idea? So…

Bjorklund: They don’t know how it’s going to fly?

Key: No, they don’t and so if you can take away some of the risk--and I do this with a minimum guarantee and once they give me an idea of how many they can sell, I try to take that number and reduce it and say, “All right, look, if you say you’re going to sell 10 million units. Let’s say you’re going to sell 2 million units, could I--I would like to get royalties on those 2 million units for the first year.” That way it’s a number that’s very small and they see that and it sounds very reasonable, the second year, I try to scale up those minimum guarantees and then the third year, they’re even higher. What you want to do is take the risk away and have them start to spend money and sign that contract. So you don’t want to top load a deal by putting all of these wants at the very beginning of the deal but, you know, string them along a little bit so at year three, if everything goes well, the royalties, your minimum guarantees are much higher and they’ve jumped on board, they’re selling your product and hopefully, everything goes well.

Bjorklund: And what makes sense in terms of the risk for them is now much less in the third year.

Key: It’s much, much less. And I think they appreciate that. It’s reasonable. Usually, minimum guarantees, you can ask for minimum guarantees if there is an exclusive involved because you know, when a company--and all companies really want an exclusive. OK, that’s--but and you can offer them an exclusive if they give you a minimum guarantee. That’s why…

Bjorklund: So that’s what you trade off with the…

Key: Yes, and that’s why it makes sense. You say, “Look, if I’m going to give you an exclusive, which other companies will not be able to manufacture this idea and I won’t be collecting royalties, give me a guarantee.” And if they don’t hit those numbers, you get your product back. So you could license it to somebody else. So it’s really a--it protects the inventor and also reduces the risk.

Bjorklund: Where are the minefields in a term agreement? You know, what are some of the mistakes you can make? You meaning the inventor because again you’re dealing with Goliath, aren’t you? I mean, you’re David, they’re Goliath.

Key: You’re right. Here is the huge one. When you’re a small independent inventor, most likely you’re going to have, you’re going to need to apply for more than one patent. You’re going to need to build a wall of patents. That builds a very strong patent portfolio. So that’s really the first step. You need to think about it and sometimes you can even ask for this company that you’re working with and maybe instead of an advance, sometimes they’ll give you money up front a little bit. You say, “Look, why don’t you help me pay for the patents?” So that way, you can get them to pay for your patents and if it goes, let’s say, they don’t hit their minimum guarantees, they paid for your patents and you get it back so you can license it to somebody else. Those are some of the things I think are important but here’s the big one. Here’s the juicy nugget that I want everybody to hear this because this is a mistake that a lot of inventors make. In your contract, make sure that there’s a clause in there that says any improvements you own because this is what happens. During the development period, there’ll be some changes especially when it’s a new product and they haven’t manufactured it before. Somewhere down the line, someone will make some variation on your idea and you don’t want them to have any ownership in that part of your project because it would be very hard then to take it to somebody else if they made some improvement on it. So, any improvements, you own. That’s a huge one and that’s one that I think some inventors miss.

Bjorklund: What about hiring an attorney? You touched on it before. You’ve said that there are patent agents and there are patent attorneys. I mean, are you better off negotiating yourself or getting help from an attorney or does it depend on the size of the company you’re dealing with?

Key: Great question. You know, if you’re new at this, what I think people should do is try to do the term sheet yourself. And maybe have a licensing attorney that you’re working with so you can understand some of the terms. Read about it. Educate yourself about it but try to do some of the business deals yourself because those are business issues. Those aren’t really legal issues. And once you have that term sheet in place, I think once you get a contract and you’re looking it over, you know, it’s going to seem like you’re reading something for the first time that, what is all this information? So try to understand it. Have your maybe someone help you with it and maybe negotiate a couple of terms. But at the very end, you’re going to need a licensing attorney to help you before you sign any document like that. I think you’d do a lot of it yourself but I think you’re going to need someone on your team that you can go back to. I always like to negotiate the deals myself. Once you get attorneys involved, sometimes it slows down. They’re trying to protect you. They’re great but in the end of the day, there are business decisions that you’re going to have make yourself. But sometimes, and I’ve seen contracts go on for a long time, that for some reason, there’s just these little clauses that you just cannot agree upon. That’s the time to get your attorney involved with their attorney and iron those little details because they can speed it up.

Bjorklund: So when lawsuits are filed, isn’t that, I mean, don’t both sides lose?

Key: You know, I’ve been in a litigation case. It was in federal court in San Francisco for three years and I’ve learned a few things through that whole ordeal. Number one, I think you need to take care, get your emotion out of it right away. It’s just business. Litigation cases are about a million and half dollars and up so it’s very, very expensive. It’s not going to be possible for most inventors…

Bjorklund: To fight?

Key: No. It’s just not.

Bjorklund: Yeah.

Key: But if you have the big idea and damages are large, then yes. It’s a fight. It’s a long fight. Sometimes you can get companies to settle very quickly but sometimes they go the whole length of the game, which could be years. And they could even appeal so that’s the last thing you want to do. Try to work it out with the party. Take your emotions out of it. Call them. How do we work together? Can you maybe get some type of royalty from it? Maybe it’s not what you want but try to move on. It’s hard and it’s expensive and at the end of the day, I don’t think anybody wins but the attorneys.

Bjorklund: Well, with regard to the lawsuits, are most of them about whose idea was this anyway or can it be just there’s so many more layers of complexity that gets into these relationships?

Key: You’re right. You know, at first, you’re thinking that there’s a right and wrong or someone that’s, you know--there’s no right or wrong, who’s made a mistake. It’s all going to be very legal, you know, you’re going to argue about words, you’re going to argue about claims. In fact, you could argue about anything forever. So it’s very complicated. I’ve watched it firsthand. I was amazed how complicated the whole process is. It’s like a prize fight.

Bjorklund: It took a few years off your life, probably.

Key: Yes, it--yes.

Bjorklund: I won’t ask you about the outcome.

Key: No, no. All I can say is that try to avoid it.

Bjorklund: Yeah.

Key: You know, there’s things that you can do along the way to protect yourself. Don’t worry about that. Just move forward and that’s where I try to help people. I say, “Look, don’t let this whole patent process slow you down. Do the right steps and move on and try to go forward and if you have a problem with somebody, call them. Don’t have your attorneys call them. See if you can work it first.” I think you’ll feel much better at the end if you do.

Bjorklund: I don’t think you get such a good response if you start with the attorney calling, right? I mean, that’s when you--some people they feel like you’re backing them into a corner.

Key: You, you are. But sometimes you have to call and sometimes you need to send those letters. But just realize, once you start that process, it’s a very expensive process and it takes years. So really understand if there’s damages and maybe if you have a problem, have your attorneys look it over and give you an opinion. You might be able to find an attorney that will take your case on a contingency.

Bjorklund: Now let’s say you do have a licensing arrangement, how do you monitor that? That seems like something where you know, everybody is operating in good faith at the beginning but how, where do you, how do check up on…?

Key: If they’re paying you correctly, is that what you’re saying? Are they paying those royalties they should or are they trying to hide some of the dollars? Well, you’re right. Usually in the licensing agreements, there will be an audit clause that you can go in, if you have to, and see if they’re doing everything correctly from paying you the royalties but understand that does cost. You know, that’s not cheap to do. And if you don’t find anything, you’re going to end up paying for that audit so, and I don’t think it builds great relationships when you audit somebody either. But I think there’s other things you could do to check to make sure they’re paying you.

Bjorklund: Do you usually get paid, by the way, on a regular basis or how does that work?

Key: You get paid quarterly.

Bjorklund: Quarterly, OK.

Key: And not all the royalty statements are the same. You might want to ask them to break it out. You can have them break it out per--I don’t think per state but maybe per category, maybe per store, you can see it that way. But usually, they’re done very thoroughly and they show you where the money’s coming in. They do subtract some things from it, a few things, but not much. They’re pretty standard and you just have to have a little bit of trust, I think at the end of the day. But if you don’t, you’ll have an audit clause where you can go in there and you can check it and if you don’t want to do that, I always call the sales guys and I get to know them very, very well. And they like to brag about it.

Bjorklund: Good strategy! I love that!

Key: They like to brag about how well they’re doing and how many sales they’re making. So I call those guys regularly. So I know and of course, I go down to the stores and make sure it’s on the shelf still and so I do my homework behind the scenes. That’s how I can watch it.

Bjorklund: What about exit strategy in a term agreement? Is that something, OK, we’re doing this for X amount of time and then we say bye-bye or how does that work?

Key: Well, if you sign the contract, usually it’s for the life of the patents. But nothing--well hopefully, it’ll last that long. I mean a lot of products basically go. You know, there’s a life cycle. Some products go on for a long time. Those are evergreens. Those are fairly rare but usually the contracts are for the life of the patents. But what you can do is file for some more patents, continuations, keep that portfolio strong so you can extend those 20 years if you have a good idea. But I think it’s rare for an idea to sell for over 20 years. I think it happens but I think it’s fairly rare so there’s a life cycle of course. But actually, I think what’s reality is, they’ll keep on paying you if it keeps on selling. And when it doesn’t sell, that’s when the royalties will stop. And I know firsthand they do stop.

Bjorklund: Yeah, ouch!

Key: Ouch.

Bjorklund: You get used to mailbox money.

Key: You know, you’re never prepared for that but that’s why I think it’s important for inventors to realize that there’s going to be ups and downs. Come up with other ideas.

Bjorklund: Yeah, have another one in the pipeline.

Key: Why not? Why not? Just keep in the game, people with other ideas and maybe even work with the same company and see if they need some other ideas and you’re working closely with them now and you’re understanding some of their problems and so maybe there’s some other ideas that you can shoot their way that they might take.

Bjorklund: What’s the shrewdest move you’ve ever made in terms of making a deal?

Key: You know, I think what’s interesting. A lot of companies want to wait before they sign a contract. And what you can do is that--find the end-user, find someone that wants your technology and bring that to your manufacturer. And so what you basically have done, you’ve found someone that wants it, that wants to order and you put them together with the company that’s going to license it from you and it kind of pulls it through the system a little bit. It’s called pull-through marketing and if you do that yourself, that’s leverage. Because now you’re going to say, “Well, gee, you know, I brought this customer to you. They want X amount.” It gives you a little bit more bargaining power because you went out and you found the customer that wants it. And I mean, you’re doing the work for them so you can maybe ask for a little bit more if you’re willing to work a little bit.

Bjorklund: What a great idea! Any last thoughts for inventors? I know you have a company called inventRight and do you help people with this phase of development?

Key: I think my specialty is licensing. I love the contracts. I love the art of negotiation. I love understanding the companies’ needs, where their holes are, where the strings are. I like the art of the deal. So at inventRight, we have a course that we sell in CDs and a workbook and we talk a lot about licensing contracts. So we try to educate. We strictly are educational. We don’t provide any other services but education. And I think if you’re going to be in the game, you need to find somebody that’s been in it, that has that experience and get close to them. And I think that’s the best advice I can give anybody that’s going to start out. You don’t want to do this alone and if you have 20 years to go through it then you know, go ahead. But find someone who’s doing it. It will make your life a lot easier.

Bjorklund: Stephen Key, thanks so much for talking to us today. I enjoyed it. Great information.

Key: Thank you.

Bjorklund: Stephen Key is a successful inventor with a 20-year track record. His company, inventRight, helps people learn how to sell their ideas using very little of their own capital. If you have suggestions for future shows or feedback on this show, send your emails to podcasts@allbusiness.com. I’m Chris Bjorklund, thank you for listening.