Let's Make a Deal

Would you like to profit from your idea without having to start your own company, worry about manufacturing or handle the expenses of marketing your product? Consider licensing.

Licensing means the owner of intellectual property (a patent, trademark, copyright or trade secret) gives someone else permission to produce the product related to that property. In return, the inventor is paid a royalty (typically 2 to 8 percent of sales). One company I worked with signed a licensing agreement with the inventor of a vibrating dental scaler. Over 10 years, the inventor's 8 percent royalty amounted to more than $30 million. Not bad for an investment of $15,000 for a patent and a rough prototype.

Licensing can be ideal if you don't have the desire or expertise to market your product. It lets you take advantage of the marketing power of a large firm and enables you to concentrate on creating more products instead of working on marketing or operations.

On the downside, once you license a product, you have no control over what the licensee does with it. The company may change the product, fail to promote it or even drop it after a few years. There's also the risk that, while investigating your idea, the licensee may decide your patent is weak and design its own version of the product.

Money Matters
While licensing does save you the expense of launching and marketing your product, it still requires some capital. Typically you need, at minimum, a patent, a prototype and research that shows there is a market for your product. If you can't finance these steps yourself, you'll need to seek an investor or partner. Partnering with a product designer, prototype engineer or small manufacturer can be a good way to share some of the financial burden while getting help with the design and manufacturing stages.

Virtually any type of product can be licensed. What varies is the stage at which a company will license the product. You may be able to strike an agreement quickly if you are already successfully producing and selling the product. You may be able to license a product with just a prototype if it meets a clear market need in a convincing way. In some cases, you may even be able to license an idea in the concept stage if the product has breakthrough potential in a major market. The key word is "may." Licensing a product in the concept stage is highly unlikely. The further along your product is, the better your chances of licensing success. Try to take your product as far as you can before approaching potential licensees.

This article was originally published in the June 2003 print edition of Entrepreneur's StartUps with the headline: Let's Make a Deal.