Patents may grant you exclusive rights to prevent others from manufacturing, selling, and importing your idea...but that doesn't necessarily mean the money will just fall into your lap.
To actually profit from your patent you must do one of three things:
What option should you decide on? That's what we are going to talk about today.
Why license your patent?
The obvious reason is to avoid the hassles of running a business (things like manufacturing, stocking inventory, and actually selling product).
The not so obvious reason is that you may not know how valuable your patent actually is until you start selling product. And the last thing you want to do is sell your patent for a fraction of its actual worth.
By licensing, you can retain ownership of the idea and allow others to sell your idea for a small fee.
The downside is that you give up some of the profits. But as you're about to see, you don't need 100% of the profits if you're idea benefits a big market.
How to License Your Patent
There are a few options when it comes to licensing your patent. One gives you a big chunk of cash up front...one gives you little nibbles of each unit sold... and one gives you the best of both worlds.
Let's take a closer look...
License Option #1: Flat Fee
Your first option is to exchange rights for cash. In this case you would negotiate for a lump sum in exchange for signing over rights to another party, generally for a limited time frame. These rights can be exclusive or non-exclusive.
For example, let's say you research diaper usage and stumble across an article in Time magazine that says an estimated 27.4 billion disposable diapers are used each year in the US. And then you invent a diaper that costs 2 pennies less to manufacture.
All those pennies add up!
That would be an annual average savings of 54.8 billion pennies... or... $548 million dollars.
Could you see how your patent would be worth 5, 10, maybe 100 million dollar per year in licensing fees?
License Option #2: Royalties
On the other hand, wouldn't it be nice to get a little piece of the action for every one of those diapers sold? And that's where royalties come in. Royalties basically allow you to collect a little bit off of each sale of an item.
Going back to our diaper example. Let's say you negotiated for 1/10th of one penny of every one of the 27.4 billion diapers sold per year. That would be worth $27.4 million every single year to you.
There is a downside to royalties though. If you sign a royalties only agreement, you run the risk of the other party "sitting" on the license...not selling anything...and not owing you a penny.
That's why your best bet to profit from your patent is...
License Option #3: Flat Fee Plus Royalties
In this scenario you take a little bit up front and a little bit of each sale.
For our diapers example, this would mean you'd ask for a few million dollars up front. And maybe 1/20th of a penny for each one sold rather than 1/10 of a penny (still netting you $13.9 million per year, not too bad).
John Rizvi is a registered Patent Attorney and is Board Certified by the Florida Bar as an expert in Intellectual Property Law. New inventors who have an idea they'd like to patent can request a free "Inventors Guide to Patent" kit. Grab a copy one of three ways:
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