Converting Your Inventions to Dollars and Cents

By Eric Guttag
August 27, 2010

How often have you felt you had a great invention that was just what the world was waiting for. Unfortunately, many would-be entrepreneurs are under the illusion that that is all they need for someone to beat a path to their doorstep, big check in hand. If only it were that easy! Turning your invention into dollars and cents requires an understanding of the process, as well as perseverance and patience in dealing with the many challenges that stand between you and potential financial reward.

The average entrepreneur usually does not think about what is really necessary to make their invention a commercial success. As a result, their great ideas often fizzle before they ever have a chance to get to the marketplace.

Some common mistakes that typically doom an invention to failure are the following:

  • Trying to make and market the invention yourself. Unless you are very familiar with commercial manufacturing and distribution operations, this will often be over the head of the average inventor. Also, the investment required for “do it yourself” businesses of this type can be daunting and difficult to obtain.
  • Use an invention marketing outfit. While there are undoubtedly some reputable ones, most invention marketing outfits are “scam and sham” operations. They frequently ask for many thousand dollars up front to conduct a “marketing evaluation” on your invention that often proves deceptive and worthless.
  • Submit your invention to a large company. Most large companies refer to these submissions as “unsolicited ideas” and as the name suggests, they usually view them as unwelcome intrusions. The inherent bureaucracy of the large company and the fact that they usually have their own R&D department greatly decrease the chance of them being interested in your invention.

So how should you go about converting your invention to dollars and cents? The most likely route to success is to get a smaller company interested in your invention and to license your rights in it to them. In doing so, you need to consider the following if you are to profit from your invention:

  1. Evaluate the marketability of your invention accurately. This is an important initial step and too often overlooked by the average inventor. You need to do some basic market research on your invention, including what others have previously done that is similar. What others have previously done is commonly referred to as “prior art” and will determine whether you have a big idea, a modest idea or no idea. If it turns out to be the latter, you may be better off looking for a different invention to exploit.
  2. Protect your invention appropriately. Most companies, including small ones, may not want to talk to you about your invention unless you have some form of “exclusivity” in it. This usually means getting a patent (or patents) that provides defensible and adequate coverage on your invention, including alternative uses for it. Just being able to say that you have applied for the patent may make the difference between getting your foot in the door and having it slammed in your face. You should also not forget about copyright, trademark and trade secret rights that might be available to protect your invention.
  3. Find the “right” small company. What you are looking for here is a company (preferably under 100 employees) whose line of business is a potential fit for your invention. Again, you will have to do some research to find the “right” company (and probably several “right” companies) that might be interested in your invention. In this regard, the local chamber of commerce often provides information on companies, including their size, annual sales, key employees and types of business they are engaged in, that can be extremely useful. Some chambers even post this information on their Web sites so that your can search for it over the Internet.
  4. License your invention for a running royalty. Some companies will want to license your invention for one upfront, “lump sum” payment. However, unless this upfront payment is fairly generous, you should favor a running royalty that is paid over time. This royalty will be based on a percentage (called the “royalty rate”) that is tied to the dollar (or number) of sales of the product that uses your invention. This will allow you to reap the appropriate financial reward if your invention does become a commercial success. Determination of the royalty rate can vary from business to business, and will frequently depend on the profit margin for that business. Usually, the higher the profit margin, the higher the royalty rate you can ask for.
  5. See if you can license your invention to more than one business. Some companies will want you to agree to an “exclusive” license with them. This means you will be unable to license your invention to others. While an exclusive license may be fine if you get the right kind of royalty, you will frequently be better off granting only a nonexclusive license. This is especially true if there are multiple uses for you invention (or more than one line of business that can use your invention), provided you have protected these other uses (see 2 above). Indeed, an exclusive license might make more sense if you can restrict it to one use or line of business (commonly called a “field of use” license), reserving to yourself the ability to license the invention in other fields.
  6. Provide “know-how” on your invention. Many companies are looking not only for rights in your invention, but also for some help on how to develop, make or market it. You can greatly increase the value of your invention by being able to provide such “know-how.” Indeed, you may be able to get additional revenue by arranging to consult with the company to whom you have licensed your invention to help them exploit it.

The great inventor Thomas Edison once said that invention was 10% inspiration and 90% perspiration. Even after following the above advice, you will perspire a lot trying to get others interested in your invention so that you can profit from it. However, the reward can be great if you do your homework, and are patient and knowledgeable in pursuing the “right” license with the “right” company. You may even find you enjoy the process of converting your invention to dollars and cents.

*© 1999 Eric W. Guttag; Published in THE ENTREPRENEUR NETWORK, page 1 (September 1999).

The Author

Eric Guttag

Eric Guttag  
Mr. Guttag has over 38 years of corporate and private intellectual property law experience on patent, trademark, copyright, trade secret and unfair competition matters, computer and Internet law, including patent application drafting, prosecution, and patentability studies; infringement and validity studies; international patent prosecution; patent and know-how licensing; consulting, confidentiality, clinical study and research agreements; trademark searches and opinions; trademark registration and prosecution; trademark freedom-to-use studies and trademark litigation and dispute resolution.

Warning & Disclaimer: The pages, articles and comments on IPWatchdog.com do not constitute legal advice, nor do they create any attorney-client relationship. The articles published express the personal opinion and views of the author and should not be attributed to the author’s employer, clients or the sponsors of IPWatchdog.com. Read more.

Discuss this

There are currently 13 Comments comments.

  1. Scott Daniels August 28, 2010 7:24 am

    Thanks Eric. I will forward this to a few of our individual inventors.

    Scott

  2. Malcolm Scoon August 28, 2010 8:02 am

    Great information especially for the licensing novice!

  3. Andrey August 28, 2010 9:14 am

    This is a great advice for the first time inventors. It also helps if the invention is: (a) analyzed for its positive and negative factors; (b) analyzed for its inherent factors affecting marketability (size, weight, odour, legality); (c) getting marketing/selling assistance from sales people. Still, many good inventions are not going to get market traction even with all the necessary ingredients in place. Logitech io2 digital pen had and has potential on which it never fully capitalized.

    Andrey, http://www.pinskylaw.ca

  4. Paul F. Morgan August 28, 2010 10:37 am

    Good points, and another problem is that so many inventors, including a lot of Phd. scientists, have no clue as to important issues such as UMC, regulatory issues, distribution costs, etc.

  5. Steve August 28, 2010 4:22 pm

    Thanks for the insightful article, Eric.

    What book or books on invention licensing would you recommend?

  6. EG August 28, 2010 6:16 pm

    To all:

    Thanks for the kind words and comments. I wrote this article because I really felt convicted to do so because many would-be entrepreneurs have very little idea what they’re getting into and especially how expensive and rsiky it can be.

    As you can see by the copyright date, I wrote this article over 10 years ago. On reading it again, I’m amazed that what I said way back then is still true today. Again, thanks for the comments.

  7. Navneet August 30, 2010 4:05 am

    EG,

    1. Your article mentions “invention marketing outfit. While there are undoubtedly some reputable ones”. Can you please share some names?
    2. Not always the large companies have all good products. Among the 100 products of the company, it is possible one or two have better options outside. From an inventors point of view, it makes more strategic sense to license the patent to such large company. What will be your advise to reach out to such large company?

  8. EG August 30, 2010 8:44 am

    “What book or books on invention licensing would you recommend?”

    Steve,

    You bring up an excellent (and for me embarrassing) question as I don’t have a list of “books” to recommend. What I wrote is based on my own empirical experience, experience of others I’ve talked, and I’ve usually read in the form of short articles.

    One volume I quite familiar with (having been involved for several years with its committee) is the AUTM Tech Transfer Practice Manual, now in its 3rd Edition. The AUTM TTP Manual addesses the licensing issue from the standpoint of university/non-profit research organizations, so we’re talking generally “big entities,” but for some of the smaller tech transfer offices, the issues are very similar to a small entrepreneur. Also, university/non-profit research organizations have to assess whether the technology is more appropriate for licensing or for spinning off a new entity to exploit the technology.

    Your question is so good that I would suggest we should compile a list of recommended readings based on the collective experience of all who want to contribute. That way would get the benefit from more than one person, and also be able to share that collective experience.

    Gene: I think a “reading list” of recommended books/articles on the practical aspects of licensing/expoliting technology for the entrepreneur would be extremely valuable.

  9. EG August 30, 2010 9:20 am

    To all:

    One other thing to note that is impacting the area of licensing of patent rights for entrepreneurs are the decisions by SCOTUS in eBay (making permanent injunctions for patent infringement more difficult to obtain, especially in you’re a “non-producing entity” (NPE)) and MedImmune (lowering, in my view, the standard for DJ actions by prospective licensees who can run to court if disagreements arise during licensing negotiations). In my opinion, SCOTUS has tipped the balance in patent licensing negotiations away from the patentee and in favor of the prospective licensee. In view of MedImmune, patentees have to tread very carefully, under the threat of a “preemptive” DJ action by the prospective licensee to apply negotiating pressure if disagreements arise during licensing negotiations. In view of eBay, most prospective licensees are only at risk of having to agree to a reaonable royalty, not the prospect of being barred by a permanent injunction. MedImmune and eBay combined lower, in my opinion, the value a patentee (on average) can extract from their patent rights in a licensing negotiation. BTW, I’ve got no statistical data to back up this view, but is simply based on what I’ve empirically seen in recent district court/Federal Circuit cases which have applied MedImmune and eBay.

  10. EG August 30, 2010 11:17 am

    Navneet,

    1. In terms of “reputable invention marketing outfits,” I’m still looking for one as there is a definite need for “reputable firms that can do this role. But the ones I’ve had experience with, or more approrpriately those clients and prospective have had experience with, haven’t been “reputable.” That’s why I’ve generally suggested avoiding such firms unless you really investigate who they are, and especially get solid information on their “successes” versus their “lack of success.” By law (the 1999 American Inventors Protection Act) they’re supposed to provide such information. But the AIPA, in my opinion, is enforced very poorly by the federal government, especially the USPTO.

    2. I don’t disagree that large companies might find “better ideas” outside. But the “company politics” as such generally don’t lend themselves to considering “not invented here” ideas. Also, as I mentioned, large companies, by nature, also have large bureacracies that make the licensing process painfully slow and frustrating (I know this from having previously worked for a “large company”). You’ll generally have much better luck with an outfit that doesn’t have an internal R&D group (or at least not a large R&D group), and that’s usually a much smaller company that is often looking for new ideas and especially the “know-how” to turn those new ideas into sellable products/services.

    Thanks for the comment.

  11. Stan E. Delo September 1, 2010 3:48 pm

    EG and Navneet;

    Excellent article EG, which reminds me of some of the issuues that came up over and over again in an inventors group I used to run for a few years here. Sometimes it seemed like inventors were Afraid to evaluate their inventions impartially, for fear that their baby might turn out be ugly, so to speak, which nobody likes to hear I suppose. We discussed finding the right licensees at quite some length on InventNet several years back, and it seemed like the consensus was to try to find an Avis company instead of a Hertz to license to, as in “We’re #2, so we try harder!”

    Best regards,
    Stan E. Delo
    Port Townsend, WA
    stand@olypen.com

  12. EG September 3, 2010 2:26 pm

    To all:

    A web site I can suggest for the would be entrepreneur is The Entrepreneur Network: http://tenonline.org . That’s where my article first appeared back in 1999.

  13. Blind Dogma September 4, 2010 9:46 am

    Some of my best pro bono work has been explaining to small inventors why there self attempted patent application needs to be changed, how to change it and what to focus on given the trends of the day.

    I was not surprised (even though some may be considering all the proceeds from my Kool-Aid sales), when a friend told me of a legal survey that pegged IP lawyers as the section of the legal industry with the highest marks for happiness.

    Helping people realize the fruits of their work tends to do that.