Should You License or Manufacture Your Invention?
By Jack Lander - NOLO.COM

Most inventors follow a typical pattern: They perfect their invention, determine its marketability, and take steps to protect it under patent laws. But then comes a difficult decision. How will the inventor make money from it? Should the inventor license the invention to a third party, or should the inventor manufacture and market the invention? This decision will affect not only how you earn money, but also how much financing you need to proceed.

If you are a typical inventor, you will probably want to license your invention and collect royalties, or even sell it outright -- we'll call this typical person the "inventor-for-royalties." But if you are more motivated and have a competitive business streak -- we'll call this type of person the "entrepreneurial inventor" -- you may wish to start a small business to produce your invention and market it. In that case, you will need substantially more financing to develop, produce, and distribute your product.

To some extent, your decision is influenced by your invention. Certain innovations, because of their complexity, scope, or exorbitant cost of production, may lend themselves to licensing. Often, however, the decision should be based more on you than on your invention. You must objectively examine your inventing personality.

The Inventor-for-Royalties

Licensing or assigning rights to your invention for cash is a simpler, less-expensive route than manufacturing and selling your invention. Licensing or assigning your invention is often preferable for those inventors who want to make money but care primarily about innovating and spending time in their lab.

Licensing

A license is simply an agreement in which you let someone else commercially use or develop your invention for a period of time. In return, you receive money -- either a one-time payment or continuing payments called royalties. As owner of the invention, you will be the "licensor," and the party receiving the license for your invention is called the "licensee." What makes a license appealing is that the licensee assumes all of the business risks, from manufacturing to marketing to stopping those who infringe on the product's patents. The inventor/licensor sits by the mailbox and waits for the quarterly royalty checks.

When you seek a license, you'll need to take the following steps: find the right people to review your great idea, get the money necessary to develop and protect your invention, and present your invention to a licensee in a marketable fashion.

Assigning

An inventor-for-royalties can also permanently assign all rights to the invention for cash. An assignment is a permanent transfer of ownership rights. When you assign your invention, you are the assignor, and whoever purchases the rights is the assignee. An assignment is like the sale of a house, after which the seller no longer has any rights over the property. As the assignor, you may receive a lump sum payment or periodic royalty payments.

Even though they have different legal meanings, the terms assignment and license are sometimes used interchangeably. Sometimes these two types of agreements seem to have the exact same effect, as in the case of an unlimited exclusive license, in which a licensee obtains the sole right to market the invention for an unlimited period of time. For this reason, you or your attorney must examine the specific conditions and obligations of each agreement to determine whether it is an assignment or license rather than simply relying on terms such as assignment and license.

The Entrepreneurial Inventor

For those who place considerable weight on the entrepreneurial side of the scales, the financial reward of a license or assignment may seem unappealing -- royalties often range from 2% to 10% of the net revenues. An entrepreneur may think, "Why should I give up my control and take a slice of the pie when I could keep the whole thing?" For this reason, inventors with a strong entrepreneurial drive often choose to form a business and to manufacture and market the product, a course of action that requires considerably more financial assistance than licensing.

Also, the same study by Zimmer and Westrum (cited above) revealed that close to half of the inventors who decided to take control of producing and marketing their invention claimed to be successful. That may be because the inventor with a strong entrepreneurial drive is usually obsessed with growing the business and thrives on the challenges -- for example, how to manufacture the invention efficiently, how to acquire distribution, how to market to target audiences, and how to eke out a profit from retail sales. But while there are potentially much greater financial rewards than can be obtained from licensing, the price that is paid personally and financially can be disastrous.

Analyzing Your Personality

Your success in gaining financing depends on your intellectual honesty in analyzing your inventor personality. Unsure if you have a strong entrepreneurial drive? Answer the following questions:

  • Are you a gifted salesperson? An entrepreneur must sell, sell, and sell to every person in the food chain, whether it is an investor, banker, distributor, or customer. Consider Ron Popeil as an example. His success as a salesperson launched many inventions including the Veg-O-Matic, Pocket Fisherman, Mr. Microphone, the Buttoneer, Food Dehydrator, and, of course, the GLH Formula 9 Hair System (also known as Hair-in-A-Can). Regardless of the quality or intellectual value of his innovations, Popeil embodies the key to the successful entrepreneur and the unstoppable skill at selling. If you lack this skill, you're probably not suited for entrepreneurial endeavors.
  • Are you a talented manager? An entrepreneur must juggle many hats, and all of them require management skills. Consider the inventor of an ergonomic computer mouse who must travel abroad each year to supervise the manufacture of his device in a foreign factory, as well as work with various international distributors and resellers. In his "free" time, he must work with the designers of his advertising and websites. If you can't delegate tasks well or find it hard to organize your desk or keep track of complex tasks, do yourself a favor and avoid marketing and manufacturing.
  • Are you a business innovator? You can't really call yourself a true entrepreneur unless your product or service involves innovation. Peter Drucker, America's foremost business sage, wrote in Innovation and Entrepreneurship, "Innovation is the specific tool of entrepreneurship, the means by which they exploit change as an opportunity for a different business or service." For example, Ron Popeil perfected an innovation -- the infomercial -- that changed the way products are sold on television. If you can invent only in the lab and not in the business world, then you may lack entrepreneurial skills and be better suited for licensing.
  • Are you a risk taker? Some of us like to bungee jump from the Golden Gate Bridge, and some of us don't. Entrepreneurs are willing to risk the whole pot on one hand. Every entrepreneur, whether it's Donald Trump, Richard Branson, Ron Popeil, or Ray Kroc, is willing to face down creditors or bankruptcy for a chance to come back for another round. If you're not a risk taker, then pursuing manufacturing and marketing is a poor decision.

Differences in Financing

In terms of financing your invention, licensing usually requires much less capital than the alternative of manufacturing and marketing your invention yourself. What's usually required is money to create a prototype (or other suitable presentation to potential licensees), to market the invention, and, perhaps, to solicit and negotiate with potential licensees. On the positive side, a successful licensing deal will free up an inventor to pursue inventing while still profiting from the last great idea. On the negative side, a bad licensing deal may tie up an innovation or, worse, result in legal battles over royalties.

You will usually need far more financing if you start your own business and manufacture and market your invention. Money is required for producing a prototype, creating tooling or molds, mass producing the product, finding distribution, collecting payments, and enforcing patent rights. In addition, entrepreneurial inventors often become involved in more complex financing than an inventor-for-royalties -- for example, you made need to form a corporation and sell shares of stock (or other interests) in the business and the invention.On the positive side, the financial rewards are potentially much greater -- which is precisely why it appeals to more entrepreneurial inventors. On the negative side, manufacturing and marketing are incredibly risky and can cause tremendous anxiety and engulf your personal life.

Which Is Right for You?

If business is your real game, and creating an invention is just your means of acquiring something to sell, then marketing and manufacturing could be the right choice for you. Same goes if you live for the deal, you're not afraid of risks, you love to innovate in commerce, and you have the discipline to fight for market share. But if none of the above sound like you, licensing is probably the correct course for you.