#HTE
How to Negotiate Your Own Licensing Agreement
For the past few months, I’ve been describing what is needed to license simple ideas for new products. Designers pride themselves on their execution. But the licensing model requires you to be willing to relinquish some control. There are enormous benefits — and self-employment is freeing.
To briefly summarize, if after you’ve studied a market and done a prior art search; determined your product idea is indeed novel; made a list of potential licensees; filed a provisional patent application; and begun reaching out to said companies over LinkedIn or by calling their corporate office… one day soon, you’ll get a response! Which may surprise you.
Know that smaller, more aggressive companies will get back to you quickly. Predictably, large companies move more slowly. They may need to bring a larger group of people together before replying, which could take between five and 10 days. My best experiences have been with midsized companies.
You’ll say to yourself, “Shit, this actually works!” Now you’re in the game. I try to get my students in the game as quickly as possible so they know this is for real, and I advise you to do the same. Polishing your design may be satisfying, but it won’t help you secure a licensing agreement.
Don’t overthink it.
The licensing process is actually pretty straightforward. It’s always made sense to me on a very practical level in that way. If your marketing materials are good, companies will be able to quickly decide if they want to discuss your idea with you further. Yes or no.
The challenge really lies in finding the right partner — the perfect match for your concept. The closer you get, the sooner you’ll hear back.
Remember, companies today are stretched thin as it is. Getting them to do something new is damn near impossible. You need to show them something that is just different enough. Of course, some companies do take chances on products that fall outside their typical purview. But those who do are most often small companies, which by definition have access to fewer resources.
Soon enough, you’ll land one. (If not, you may be approaching the wrong companies.) And just like that — the time to dance has begun.
Keep in mind… this is a slow dance. Finalizing a deal will take longer than you expect. No matter. Your attitude is everything. Be explicit, and continue to tell the company that if they’re interested, you can get a deal done. Make it very clear that you’re happy to be working with them — that you’re optimistic, excited, appreciative, and looking toward the future. Setting the right tone is extremely important; I cannot stress this enough. Look at every interaction you have as an opportunity to keep setting the right tone. When things move more slowly than you want, don’t let your emotions get the best of you.
You don’t want to step on anyone’s toes and you don’t want to unnecessarily throw up any red flags. Be patient.
Early on, most of your conversations will be through email. That creates a paper trail, which is great.
But after a few exchanges, get on the phone. You need more information, and having a phone conversation will provide some in more ways than one. Everything from what is said to how much time on the phone your contact spends with you will shed light on their level of interest. I previously wrote about the value of sending each company on your list a unique link to your video. This allows you to track when and how often they click that link. Have they been watching? If they’re playing it cool, but they’ve watched your video 12 times… draw your own conclusions. The party with the most information usually wins.
After you get some initial interest, continue reaching out to other potential licensees. Don’t assume it’s a done deal! Deals falls out all the time.
Keep the momentum you’ve got going. Time is money! Having multiple companies interested in your product is never a problem. (Not because I think you can leverage one against the others, per se. That’s unrealistic, although it does happen.) The bigger picture is, continuing to reach out to other potential licensees is a form of protection. If you’ve filed a provisional patent application, your patent pending status is a ticking 12-month time bomb. So make haste!
Because if you disclose your idea publicly and don’t move quickly enough, you may end up having to make an expensive decision when those 12 months are up — meaning file a non-provisional application. Filing a non-provisional patent application on your own, with no interest? That’s more risk than I want to take on. I prefer to get my licensees to pay for a patent to be written in my name, of course, and so do other licensing experts like Gene Luoma, best known for inventing the drain-clearing tool Zip-It. “The hardest part is keeping it simple,” Luoma likes to say. I agree.
Look at it like this. The minute a marketing manager (or whoever else it is you reached out to) gets back in touch with you, the negotiation process has begun.
Expect to receive a response along the following lines. “Thank you for submitting your idea to us. Do you have time for a few questions?”
This is the ideal opportunity to gather as much information as you can about the company. You’re both checking each other out! So prepare to ask questions. Is this company the right fit for you?
You’ll be asked what you’re looking for. My answer: “I am not looking to manufacture; I’m looking to license my product. I’m looking for a royalty on each unit sold.”
At that point the first thing out of their mouth will be, “What royalty rate are you looking for?”
To which I respond, “If I understood your business a little bit more, I could come up with an appropriate royalty rate that works for both of us.”
Pulling a number out of thin air without knowing the potential revenue opportunity? That’s not smart. At this point, the tables will have turned a bit. Now, they’re selling you.
Ask them how many stores they have product in. Some people will readily share this information with you, but it’s more likely they’ll be vague. That’s okay. You can find out more on your own. If they tell you they’re in Walmart or Kmart, you can always Google how many retail outlets there are.
Assume each retail store sells one unit a week. (If not… your product is going to be kicked to the curb.) Now apply different royalty rates. How much will you make at a five percent royalty? Seven? Three?
Almost always, they will ask you for an exclusive. When you give someone an exclusive, you lose the ability to sell your technology to anyone else, meaning your royalty stream is finite. If your projected revenue is too low, you should walk away. If you’ve been granted a patent or have proven sales, you can negotiate a higher royalty rate, like between seven and 10 percent.
To be clear though, royalty rates are less important than how many stores they’re in and the minimum guarantees they’re willing to commit to. Remember, at this point, you’re still dating! You don’t want to ask any hard questions, which include minimum guarantees, yet.
Don’t be caught off guard when they ask you about your intellectual property fairly quickly as well. If you’ve filed a provisional patent application, then your answer is easy; tell them your concept is patent-pending. At that point they may want to see your provisional patent application, which is not a problem. But you might want to ask them to sign a non-disclosure agreement, given that you’ll be sharing confidential information with them.
Most likely, they will not sign yours, and will instead offer one of their own. There is nothing wrong with this, but make sure to examine their document very closely. Confidentiality agreements are written so that they protect both parties — what is known as a mutual non-disclosure agreement — or just one. If something doesn’t sound right, consult a patent attorney or a licensing attorney. Yes, this will slow down the momentum you’ve got going. But it also makes you look more professional. To be honest, I’ve never relied on confidentiality agreements to protect me. But from a public disclosure standpoint, they’re absolutely helpful. They can help you extend the length of your provisional patent application, for example. But please note laws regarding non-disclosure agreements differ between states. IPWatchDog.com has some good sample confidentiality agreements.
Once you’ve come to an agreement, send them your provisional patent application and any other information that might help them figure out whether your product is right for them.
Continue following up with your contact.
inventRight coach David Fedewa, who has licensed several of his ideas, puts it like this: “You want to stay on top of their pile — on their radar, in other words.” So Fedewa follows up with companies that are interested in his ideas every week and does so alternating between emails and calls. He focuses on how he can be helpful by literally asking questions like: How can I help? Do you need any more information?
“If you keep demanding, ‘Do you have a decision? Do you have a decision?’ then you’re likely to be thought of a pest. But if you offer a helping hand, they’re more likely to think of you as a resource. 'Why not work with him?’” Fedewa explained.
If the company isn’t getting back to you despite your best efforts, you can always ask them pointblank as a last resort: Are you interested? In my experience, that’s usually enough to get people off a rock.
If they are interested, that’s when you should ask if you can put together a few terms that you all agree upon before moving forward. Technically, what I’m referring to is a term sheet, but you don’t have to call it that.
Next up, I’ll tackle what that term sheet should include, as well as negotiation dos, don'ts, and deal-killers.
Congrats - You’ve got interest!
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