Have you asked yourself, “Is this idea worth my time?” Some inventors become so excited by their product idea that they forget to assess if the project is even worth pursuing. Are you going to make enough money from this idea for it to be worth your while? These are important questions to ask before delving into the licensing game, and doing the math can help you answer them. If you figure out you’d — at the very most — make around $20,000 a year, then maybe it’s not worth it. Maybe it is. But either way, you should have an idea of what you’re getting into.
Doing the math will also help you determine the terms of your licensing agreement. For example, I wouldn’t offer a company with limited distribution an exclusive agreement — I would try to see if other companies were willing to license my idea too. It’s also a good idea to include a performance clause in your agreement. What if the company licenses your idea, but doesn’t sell one product the first year? Don’t be left stranded. A performance clause simply states that you will be paid a minimum amount each quarter, regardless of how many products are actually sold. If the company decides that they no longer want to pay you, your agreement is void. It might take your potential licensee some time to begin effectively selling your product idea, but in the meantime, you’ll be paid. I usually ask for 25% of what I think could be sold at full capacity the first quarter; 50% the next quarter; and 75% the next quarter, recognizing that it could take some time before they step up their game. It’s important to make your minimum guarantees reasonable — most companies don’t like to hear about them in the first place, and asking for too much won’t do you any favors. Doing the math will help you devise a reasonable amount to ask for and can also be used as justification for what you’re asking (if they’re confused or unclear, etc.). Read the blog before this one for an example of the computation to use.
StephenKey is a successful award-winning inventor who has licensed over 20
products in the past 30 years. He is a board member of Accudial
Pharmaceuticals, Inc. and has a new book "One Simple Idea: Turn your
dreams into a licensing goldmine while letting others do the work," from
McGraw-Hill. Along with business partner Andrew Krauss, Stephen runs
inventRight, a company dedicated to education. Teaching inventors and
entrepreneurs the skills needed to successfully license their ideas. You
can listen to the weekly radio show on inventing.
One
Simple Idea is available in book stores and online book retailers
nationwide. When you buy the book you get access to our our database of
over 1400 companies looking for ideas as well as other bonus materials.
Visit www.inventright.com to learn more.
