Should You License or Manufacture Your Invention?

Factors to consider when deciding whether to license your invention or manufacture and market it yourself.

By , Attorney · Benjamin N. Cardozo School of Law

There are two main ways in which inventors can seek to profit from their inventions:

  1. "Inventor-for-Royalties": If you are a typical inventor, you will want to license your invention and collect royalties, or even sell it outright to another person or entity.
  2. "Entrepreneurial Inventor": If you want to maintain control and you have a competitive business streak, you might wish to start a small business to produce your invention, and then market it yourself. In that case, you will need substantially more financing to develop, produce, and distribute your product.

Which method is best for your particular invention and goals? There is no "correct" answer. These different options will affect not only how you earn money, but also how much financing you will need in order to proceed.

Your success at either method will likely depend on your personality, capital investment, and perhaps most importantly, the time that you are able to commit to running a business yourself.

Two Avenues By Which to Profit From Your Invention

Whether you choose to license your invention or market and manufacture it yourself probably depends on your personality, skills, and interests.

Your decision will no doubt be influenced by the nature of your invention. Certain innovations, because of their complexity, scope, or exorbitant cost of production, readily lend themselves to licensing.

For example, if you design a new piece of industrial machinery, you might not have the money or factory space to easily mass produce it. Licensing or selling that same idea to a company that's already prepared to undertake such an endeavor might yield better results, unless you have the financial capital to invest in your own operations.

Often, however, the decision to license is based more on the person than on the particulars of the invention. You must objectively examine your inventing personality. Is your goal to build a company? Do you have the time to find investors, lease factory space, and market your invention to buyers? The answers might inform your decision.

The Inventor-for-Royalties

Licensing or assigning rights to your invention is likely to be a simpler, less expensive route than manufacturing and selling it. Licensing or assigning your invention is often preferable for inventors who want to make money, but care primarily about innovating and spending time in the office or lab. These types of inventors are generally unwilling to undertake all of the business-related tasks involved in developing, manufacturing, marketing, and selling an invention.

To license or assign your invention, however, you actually need something to license or assign. This is where patent law often comes into play. Inventors must have some sort of intellectual property protection over their invention, which another person or entity would buy (or "rent"). To state the obvious, if you do not have an exclusive right over your invention, why would someone else pay you for the right to manufacture and sell it?

How do you obtain a patent over an invention? Most inventors will apply for a utility patent, or more likely, a provisional patent (which confers limited initial rights more quickly than a full patent).

What is a license? A license is simply an agreement by which you let someone else commercially use or develop your invention for a period of time. In return, you receive money, usually either a one-time payment or continuing payments called royalties. As the owner of the invention, you are the "licensor" and the party receiving the license for your invention is the "licensee."

Advantages of licensing. What makes a license appealing is that the licensee assumes all the business costs and risks, from manufacturing to marketing to attempting to stop people who infringe on the product's patents. Depending on the specifics of the agreement, the inventor/licensor might need only to sit by the mailbox and wait for the quarterly royalty checks.

Disadvantages of licensing. While licensing means less work, it can also mean less profit. The entity that accepts the risk of mass producing and selling your product will likely claim a much greater percentage of the revenue. Moreover, by licensing, you lose control over the execution of "your" idea. This could mean watching the licensee bungle its approach to the product, which can be emotionally painful for you.

Chance of licensing success is low. Unfortunately, finding someone to license your invention can be a struggle, unless you have a connection to an entity willing to manufacture your product and undertake the built-in risk. A study by Edward Zimmer and Ronald Westrum revealed that only about 13% of inventors who attempted to license their invention were successful. (This data was based on people who responded to the study, which probably skews the percentage positively. Those who were unsuccessful were probably less likely to respond at all.)

How to license your invention. There are several steps to successfully licensing your invention. First, you must find the right people to review your idea and ensure that it has appeal. Second, you must raise the money necessary to develop and protect your invention, such that it can be licensed in a complete form to a third party. Third, you must present your invention to a licensee in a marketable fashion, including any necessary instructions or support.

Assigning rights to your invention. An inventor-for-royalties can assign all rights to the invention for cash. Unlike merely licensing your rights, an assignment is permanent. How does assignment work? 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.

Is it an assignment or a license agreement? The terms "assignment" and "license" are sometimes used interchangeably. And 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 net revenues. Such inventors often choose to form a business and to manufacture and market the product themselves. Of course, this will require considerably more financial input than licensing.

What is your chance of success? The study by Zimmer and Westrum mentioned above revealed that nearly half of the inventors who decided to take control of producing and marketing their invention claimed to be successful. That may be because an inventor with a strong entrepreneurial drive is obsessed with growing the business and thrives on 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.

Advantages and disadvantages of marketing and manufacturing your invention. The financial rewards are potentially much greater if you are willing to undertake all of the investment in manufacturing and producing your invention. This is precisely why it appeals to more entrepreneurial inventors who are willing to be CEOs of their own little companies. On the negative side, manufacturing and marketing are incredibly risky, and can cause tremendous anxiety and engulf your life, not to mention your savings, more than you might wish.

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