Licensing Your Product

Grow by granting others permission to utilize your concept.
Magazine Contributor
10 min read

This story appears in the January 1997 issue of . Subscribe »

If you attended or watched the Olympic Games in Atlanta last summer, you noticed plenty of T-shirts, hats, coffee mugs and other souvenirs bearing the distinctive five-ring logo. The Atlanta Committee for the Olympic Games sold to the manufacturers of those items the right to use that logo, reaping huge revenues for the Committee and the U.S. teams it supports.

Your business doesn't have to be a gold-medal winner to profit from the sale of your products or ideas. You can trade total control for profit if you have a proprietary technology (such as a software program you developed and to which you own the exclusive rights), or a unique product or process that has value to another company. "You have this little treasure-trove of value, and licensing is the key to unlocking it," comments Richard Harris, an attorney in the Intellectual Property Group at Day, Berry & Howard, a law firm in Hartford, Connecticut. Your one-of-a-kind formula for modeling clay, for instance, or that great idea for a video game, can be your company's treasure-trove.

To find a licensee, consider the niche your product fills in a particular industry, and think about which companies might benefit from holding a license to use it. But before you begin your search to find an appropriate licensee, ask yourself the three questions below, heed our experts' advice, and listen to how a successful start-up tapped into a gold mine of its own.

Stephanie Hainsfurther is a small-business columnist and freelance writer who lives near Hartford, Connecticut.

Whats In It for Me?

Licensing can be an alternative to finding investment capital for further product development. Your company might require a licensee who has the finances and facilities to manufacture your product. It can be a way to have others sell your invention, test a new product, or try an overseas market without financial risk to you. Before you start looking for a suitable licensee, though, know what you want to get out of the arrangement.

"What we got was a significant market presence and instant market share," recalls Frank Sentner, co-developer of the Creative Information Systems Co. Ltd. (CISCO) Agency Management System, computer software for independent insurance agents. Operating from the sun porch of his home in Milburn, New Jersey, Sentner began to develop the software for one particular client. He wanted to create an automation system for insurance agencies that was superior to anything in the current marketplace, have the client help him test it, and then sell it directly to individual agencies.

His vice president of sales had even bigger ideas. "His vision of how we should sell the package was as the second generation of an existing agency-management system," Sentner remarks. "He wasn't interested in onesy-twosy sales to agents, or in spending ten years building the company." When they heard through industry sources that Aetna Life and Casualty Co. was looking for a replacement for their Gemini agency system, the small start-up called on the insurance giant. The rest, as Sentner says, is history.

Aetna helped CISCO develop and package their system, then handed over an established list of customers. "We were licensing to an existing distributor of software (Aetna). They significantly enhanced the product, and we received capital for development," Sentner states. "They not only put up the front-end money, but put two years of development into the product. We reaped the benefit of Aetna's significant expertise in that they were skilled at the deployment process, the packaging, distribution, implementation and support of the package on a large scale, for which we had no experience. And we got an immediate access to a marketplace of agents who were clamoring for a replacement system, along with the financial wherewithal to address the marketplace with some level of confidence." CISCO went on to form a strategic alliance with Aetna, creating a new company, CISGEM Technologies Inc., that was eventually acquired by a competitor.

Can I Keep a Secret?

In its early days of business, only two people at CISCO knew the password to access their program. That secrecy was vital to the development of their product because it kept their proprietary information away from prying eyes.

Protecting the rights to your own product begins long before you sign a licensing agreement. Often, entrepreneurs protect their products or proprietary information by securing a patent or copyright. But these methods of protecting your rights have built-in time limitations: patents expire in 14 to 20 years, depending on the type of patent issued, and copyrights last for as long as the author lives, plus 50 years. Once those limits expire, so do your exclusive rights, and your brainchild becomes public property.

There's another way to safeguard your rights that's as simple as keeping a secret. A trade secret--such as an idea, design or formula that makes your product unique--is valuable information. Telling that secret nullifies your product's value. Keeping it secret maintains its value to you, and its salability to any future licensee.

Harris uses Coca-Cola as the classic example of the trade secret principle. "There is no patent on the formula for Coca-Cola," he says. "It's a trade secret, and they keep it under lock and key. Very few people in the company know what the formula is; it's very carefully protected. Under current law, if Coca-Cola had tried to patent that formula, 20 years later everybody would have had Coca-Cola taste-alikes."

To call your product design or formula a trade secret, you must treat it as such within your day-to-day operations structure. "Trade secrets need to receive special treatment within the business," cautions Harris. "Otherwise, you can't really claim them as trade secrets." Design a comprehensive security plan and stick to it. Here are Harris's tips for keeping your "secret recipe" under wraps:

  • Limit access to your trade secret information. Not everyone in your company should have a working connection to your trade secret. Don't give everyone permission to view it or use it. Institute appropriate security measures, whether that means securing your database or simply keeping the information in a locked drawer. Mark any documents regarding your trade secret with words like "Proprietary," "Do Not Copy," "Confidential," and "Top Secret."

  • Set up the proper legal restraints to prevent employee theft. Have everyone in the company, regardless of his or her access to the information, sign a non-disclosure agreement and a non-compete agreement. A non-disclosure agreement states that the person signing it will not divulge proprietary information to others; a non-compete agreement prevents the employee from taking that information to a competitor or using it to launch a competing business. "The non-disclosure and the non-compete agreements deal with the fact that, while you can make employees give back all the paper, you can't make them give back all the memories," Harris comments. Don't forget that employees also include temporaries, contractors and consultants who perform work for you on an interim basis.

  • Protect yourself during negotiations. Potential licensees will, of course, want to examine your trade secret before they buy. Have them sign a confidentiality agreement, wherein they agree to keep the information private, as well as a non-compete agreement.

Carrying out these routine security procedures will help keep your trade secret confidential and make it more attractive to a potential licensee.

Which Rights Will I Transfer?

Restricting the terms of the licensing agreement can help or hinder you from reaching your goals. Use the granting clause of the licensing agreement to lay out the restrictions you will put on the actions of the licensee. "Basically, now that you know what you want to get out of licensing, how much are you willing to give up?" asks Harris. Setting limits on such details as use, geographical area, markets served, and time frame can free you to sell your product again to future licensees.

For instance, the Olympics Committee licenses its logo to certain manufacturers, but places restrictions on the use of that logo. "You can write these licenses to say that they can only use it on the left pant leg of the sweat suit, then you can give somebody else the right to use it on the other pant leg," Harris says. "Which means that, if you're the licensor, you need to be very careful about how you write this agreement. The negotiation of these limitations and protections is the licensing `mating dance' you go through."

Be careful, though, of how tightly you choreograph the dance. Over-limiting your licensing agreement can impair the licensee's ability to turn a profit, thereby defeating your original purpose. "If you're depending on royalties, for example," Harris points out, "it may not be to your benefit to place a lot of restrictions on the licensee."

Royalties comprise a stream of payments to you from the sale or use of your product. There are different ways to determine the calculation of those royalties. Your income from a licensing agreement could be based on:

  • the number of products sold by a licensee;

  • the number of times the licensee uses your idea;

  • gross revenue of the licensee from sales of your product;

  • net revenue of the licensee from sales of your product; or

  • a combination of two or more of these arrangements.

Sometimes, negotiation of a lump-sum payment is possible, but a revenue-producing flow of royalties is the more common arrangement. "What kind of cash flow do you want?" asks Harris. "Do you want an immediate cash infusion, so you can take that money and develop the product further? Are you looking for a steady stream of cash?" Any payment arrangement included in the licensing agreement should dovetail with your overall business plan and estate-planning issues.

Because it is nearly impossible for you to monitor the day-to-day activities of the licensee in regard to your product, work a written schedule of audits into your licensing agreement, and designate who will pay for them. "Audits are done routinely, but at a cost. Decide up front who's going to bear those costs," Harris cautions.

As with any important contract, seek advice from an attorney--in this case, one who specializes in intellectual property law and can help you draft a licensing agreement that protects your claim to your particular pot of gold. One final caveat from attorney Harris: "I always use the Beatles as an example. When they were starting out, they signed a contract that basically gave away the copyright to all their early songs, for a pittance. At the time, they had no idea they were going to make it big. If they had been thinking about it from the very beginning, they could have protected themselves by limiting the scope of the license."

Worth Reading

The Inventor's Handbook, Second Edition, by Robert Park, Betterway Books, $14.95 retail, or order directly for $5.95 (plus $3.50 S&H). To order, call (800) 289-0963. Limited supply.

The Layman's Law Guide to Patents, Trademarks and Copyrights, Second Edition (from the Layman's Law Guide series), by David G. Rosenbaum, Career Press, $8.95 (plus $4 S&H). To order, call (800) 227-3371.

For More Information

On the current and proper uses of patent and copyright information:

  • U.S. Patent and Trademark Office, Department of Commerce, Washington, DC 20231, (702) 557-7800.

On help with strategic planning:

  • MIT Enterprise ForumR, Inc.; ask for information on their Start-Up Clinics, (617) 253-0015.

To find an attorney who specializes in intellectual property law:

  • call your local Bar Association; or

  • consult the Martindale-Hubbell Law Directory at your public library, in which attorneys are listed by state and specialty.

Contact Source

Day, Berry & Howard, 1 City Place, 25th Fl., Hartford, CT 06103, (860) 275-0294.

More from Entrepreneur
Our Franchise Advisors are here to help you throughout the entire process of building your franchise organization!
  1. Schedule a FREE one-on-one session with a Franchise Advisor
  2. Choose one of our programs that matches your needs, budget, and timeline
  3. Launch your new franchise organization
Make sure you’re covered if an employee gets injured at work by
  • Providing us with basic information about your business
  • Verifying details about your business with one of our specialists
  • Speaking with an agent who is specifically suited to insure your business
Try a risk-free trial of Entrepreneur’s BIZ PLANNING PLUS powered by LivePlan for 60 days:
  • Get step-by-step guidance for writing your plan
  • Gain inspiration from 500+ sample plans
  • Utilize business and legal templates
  • And much more

Latest on Entrepreneur