A FREE Practical Guide to Licensing Your Invention

  • Step 1 – Product: Pick a problem
  • How can I protect and monetize the rights to my idea?
  • How can I get my invention to market?

Every day, people just like you come up with solutions to everyday problems: inventions that would make life easier or even improve society. Not every invention is going to result in a financial windfall, and, truthfully, many ideas are not worth pursuing at all. But, for every inventor that earns substantial money from inventing, there is another who lets a great idea fall to the wayside because the inventor simply doesn’t know how to sell it. Don’t be this second kind of inventor!

Inventing for Money – Step 1 – Product: Pick a problem

As an inventor, you already know that great inventions start with solving real-life problems; after all, only poets get paid for answering questions not asked. Keep your eyes open for problems to solve; they are all around us, everyday. Here are some examples, and for the sake of expediency we’ll focus on common kitchen problems.

  • Chop an onion without wasting any pieces
  • Compost leftovers indoors
  • Keep bananas perfectly ripe
  • Take the stems off strawberries without wasting half the berry
  • Keep ants out of the cupboard
  • Remember how long ago condiments in the fridge were first opened

Most people deal with these little problems without giving them much thought. The trick is to train your inventor brain to recognize when little problems occur and remember them. Everybody experiences the same problems; because you are an inventor, you stop and take note and then take action.

Of course, some inventions are complex and require a team effort. Often these inventions are composed of many incremental inventions and patents. The principle of solving small problems remains true, but small problems are batched together to help solve bigger problems.

For example, a quick search of patents for which Microsoft is the assignee reveals over 16,000 examples. These range from “Slide out interface bar” (US 5914716, granted in 1997), which “reduce[s] the occasions in which a user clicks a mouse to gain access to, or activate, a computer resource,” to “Generational global name table” (US7454436, granted in 2008), which “permits efficient management of the growth of the generational global name table.” Each of these 16,000-plus patents solves some incremental computer-related problem. Put them together and they comprise a $200-billion business.

When identifying the problem, five points are key:

A. Are You Interested in the Problem?

Inventing can be hard work, and most successful inventors have a personal passion for solving the problems that they encounter every day. If you experience a problem, think about what it would mean if you could find a solution. It’s difficult for most people to dedicate themselves to finding solutions for challenges that are abstract.
Often the more “everyday” an invention is, the more people will need it and be willing to pay for it. It is wonderfully fortunate for inventors that many of us will suffer the same kinds of daily problems. Nagging inconveniences discomfort and inefficiencies are all of the kinds of things that people will pay to eliminate from their lives.

B. Can You Prototype a Solution?

We all have ideas. Anyone would love to create a machine like the transporter on Star Trek that will beam someone to the office and then back home every day. The chances of building a prototype? Probably zero.

Your idea will only have commercial value if you have the resources to make it a reality. You don’t need a working prototype to receive a patent, but you definitely need one to produce it yourself or license it to a manufacturer. If you are convinced that your gizmo will work and you don’t have the resources to make it yourself, hire a professional fabricator

C. Are There Enough People Who Will Buy It?

  • To be successful, your invention needs to be ubiquitous. The more people who can benefit from it or use it, the better. If you are not sure, try to answer these questions.
  • Does your gadget sufficiently reduce effort, solve a problem, or fulfill a desire in such a way that you would part with your hard-earned dollars to have the device?
  • Ask a friend to write you a check for the gadget. What is their response?
  • Is it something that they would come to you to buy, or would you have to do some arm-twisting?
  • Would you recommend the purchase if a stranger had invented it?
  • Is there a niche or gap in the marketplace that your product will fill?

D. Can the Product Be Sold for Four Times the Cost to Build it?

Being able to build a prototype is not enough to ensure commercial viability. For example, let’s say you designed a kitchen gadget that automatically peeled potatoes. You build your prototype. The cost of manufacturing is $275 each. All the other costs, shipping, marketing, overhead, returns, profit will be four times as much, or $1,100. You need to ask yourself if YOU would pay $1,100 to have your potatoes peeled. If you were a homeowner, you probably would not. But how about a large commercial food processor? Could your automatic potato peeler be sold to businesses? These are questions for which you need the answers.

E. Is the Invention Protectable Against Better-Funded Competitors?

It’s a dog-eat-dog world out there. You may very well need to defend your patent against a big company claiming that your patented gizmo is no different from their gizmo, or is not unique, or even infringes on one or more of their patents.

Inventing for Money – Step 2 – Protect: Patent your idea

After months or years of development and testing, you’ve perfected your gizmo, your new process that will make manufacturing faster and cheaper, or a new medical device that will help save lives.

There it is, waiting in your garage or kitchen or workroom, ready to be introduced to the world!

But you don’t want to simply give away your invention, like open-source software is given away. You’re entitled to be rewarded for your hard work. You want to monetize your idea and make a profit.

To do this you need to get legal protection. You need to be able to prove that the invention is yours and yours alone.

The first thing you should do is go to the website of the United States Patent and Trademark Office at uspto.gov.

It is not the purpose of this guide to reprint the information that you will find on the USPTO website or in its many publications. The USPTO Patents Process page will lead you step-by-step through the patent application procedure. What this guide will do is reveal the key parts of the process and provide a layman’s interpretation of what can seem like a dense and lawyerly process.

Conduct a Patent Search

To summarize, patent novelty searches can help determine whether your invention is indeed novel or whether someone has previously patented your idea. Although patent searches are expensive, they are much less expensive than the cost of actually filing a patent application, and they can help you prepare a more effective application. Additionally, the patent search can be used as the basis for seeking expedited examination in the Patent Office. Keep in mind, though, that patent searches are not perfect, and it is not uncommon for patents to turn up later that were not discovered in the initial patent novelty search.

There are many reasons to search the patent archives for prior patents. For example, before filing a patent application on a new invention, it is often a good idea to search to determine whether someone else has already patented the invention. A search to determine whether an invention is new is called a novelty search. Performing an invention novelty search prior to filing a patent application can significantly reduce the likelihood of having your patent application rejected due to prior similar inventions. Obviously, there is no point in filing a patent application if someone else has already patented the exact same idea. Also, performing a patent search will help provide a clearer picture of what aspects of your invention are new and which ones have already been protected or claimed by others.

As helpful as patent searches can be in certain circumstances, there are a couple of limitations which need to be considered before searching. First of all, patent searches are not completely reliable, since searching does not provide access to pending patent applications which have not yet been published. Historically, only issued patents and not pending patent applications have been available to the public. As of November 29, 2000, patent applicants can elect to have their applications published and available for public searching. This publication of pending patent applications occurs approximately 18 months after the priority filing date of the application. Since about 350,000 patent applications are filed each year, you can expect that about half a million of the most recent United States inventions are not even accessible for searching. If your invention relates to a recent or quickly developing area of technology, there is a reasonable likelihood that some of the patents you would like to search are inaccessible, buried in the large stack of unpublished applications.

The other reliability problem associated with searching is that the available search tools are not perfect. Until very recently, patent searches were performed largely by professional searchers in tennis shoes who would race through the millions of shelved patents in the Patent Office, searching through stacks of documents for specific related art. Trained searchers could proficiently scan quickly through boxes of patents, rapidly checking titles, abstracts and figures for hints of a specific invention. These traditional searches, although time consuming, produced surprisingly good results. The problem with these manual searches, however, was that if specific patents were missing from the shelves being searched, significant searching errors could occur. Keeping the patent stacks in pristine condition for searching has always been a losing battle for the Patent Office.

Over the past two decades or so the Patent Office has become computerized, providing much greater accessibility and improved availability of patent documents. With documents available electronically, past limitations such as having patents physically missing from the shelves, or Patent Office restricted operating hours, no longer apply. Unfortunately, searching patents by computer is in many ways different and in some ways less effective than searching by flipping through related stacks of documents. Current patent searching by computer is generally performed by searching specific terms or key words. Early inventions in a specific technology, however, by their very nature may lack a common language with which to describe the technology. An example of this can be seen in describing certain electronic circuits. Although the function of a circuit might be easily identified, the structure might be such that five different engineers might characterize the invention in five different ways. Over time a common vocabulary will evolve around the circuit, making document searching possible, but those earlier patents relating to the technology may or may not use any of the later adopted terms or vocabulary. Without well-defined words to characterize an invention, searching by key words can be difficult or impossible.

A second difficulty with computer searching is that some inventions, especially those that are mechanical in nature, are most effectively searched by looking at figures or schematics of the invention. For example, a conventional paper clip is easily recognized by its appearance, but using a keyword search to describe the structure of a standard metal paper clip, or to find a patent of a device of similar shape but having some other function, would be extremely challenging.

The point is that patent searching is not an exact science, and whether searching manually or by computer, expect that pretty decent searches are possible but exhaustive searches are not.

Provisional Application for a Patent

Filing for a patent can be expensive. You may not be sure if the gizmo you have invented is commercially viable. Before you make a big investment, you may want to have provisional legal protection without going through the full patent process.

You can. Since June 8, 1995, the USPTO has offered inventors the option of filing a provisional application for a utility or plant patent. This is designed to provide a lower-cost first patent filing in the United States.

Then, should you choose to proceed with your plans to monetize your invention, you are entitled to claim the benefit of a provisional application in a corresponding nonprovisional application filed no later than 12 months after the provisional application filing date.

But first things first: the provisional application.

A provisional patent application can be thought of as a placeholder application. It has many of the advantages of a regularly filed, nonprovisional patent application, but it differs in several important ways.

  1. Provisional applications have reduced formality requirements. Unlike nonprovisional applications, provisional patent applications are not subject to specific formatting or organization requirements, text and figures can be handwritten, there is no spelling requirement, no need to discuss prior art, no requirement for a summary or an abstract, and significantly, no requirement for patent claims, which are essential in order to receive a filing date for a nonprovisional application. (The “claim” is the exact protection you seek. “An apparatus for feeding birds, such apparatus comprising a cylinder with holes…” is your claim.)
  2. The provisional application, once filed, is never actually examined by the USPTO examiner. This lowers the cost compared to a nonprovisional application.
  3. Filing a provisional application allows you to use the “patent pending” notice in connection with the invention, and enables immediate commercial promotion of the invention. The use of the “patent pending” label provides an aura of legitimacy and novelty to a product, and it may create a chill in the marketplace for other developers of similar products who see the product and recognize that a patent is pending. (It is against the law in the United States and in many foreign countries to affix a “patent pending” notice to a product or an invention in which there is no patent pending. In the United States, a penalty or fine of $500 per offense accompanies the improper labeling of a product in this way; half of this fine is paid to the person identifying the mislabeled goods.)
  4. The provisional patent application is a relatively efficient and cost-effective way of protecting an invention during the early development process. Multiple provisional applications can be referenced by a later-filed nonprovisional application, combining their ideas into a single document. This can be particularly useful when an invention is undergoing development.

Filing a Provisional Application

The provisional application involves filing a simplified invention disclosure to secure a fixed date for purposes of both United States and foreign priority. Provisional applications can provide a lower cost, expeditious, and informal mechanism for getting legal protection for an invention.

A provisional application must be made in the name of all of the inventors of a given invention. It can be filed up to twelve months following the date of first sale, offer for sale, public use, or publication of the invention.

A filing date will be assigned to a provisional application only when it contains:

USPTO Services for Independent Inventors
To encourage individual entrepreneurship, the Patent Office offers programs and discounts to independent inventors. Inventors who qualify as a small entity (e.g., independent inventor, a small business, or a nonprofit organization) are eligible for a fifty-percent reduction in the USPTO’s filing, issue and maintenance fees. That can translate into a savings of thousands of dollars when compared to what large corporations pay.

The USPTO Inventors Assistance Program is specifically geared to small inventors and entrepreneurs, and offers a wide variety of incentives and benefits.

Patent Timeline

Here are the basic steps you can expect when you file your patent.

  1. Perform a search to ensure your device has not already been patented.
  2. Choose the type of patent you need (probably a utility patent).
  3. Choose to file provisional or nonprovisional patent. If you have invented a device, you will almost always file a provisional patent first.
  4. Choose to file yourself (pro se) or use an attorney or agent.
  5. These days, filing can be done online. If pro se, then you should become a registered user of USPTO’s Electronic Filing System (EFS-Web) and Patent Application Information Retrieval (PAIR) system.
  6. File your patent application and documents using EFS-Web, the USPTO’s Web-based patent application and document submission solution. Paper applications received by the USPTO are numbered in sequential order and the applicants are informed within eight weeks of the application number and official filing date. However, if you file electronically, your application number is available within minutes.
  7. If you are filing a nonprovisional utility patent application, the USPTO examiner will review your application. The examiner may contact you with questions or for clarification. If rejected, you may appeal.
  8. Here’s the question everyone wants to know: How long does it take before my application is approved? The USPTO says that the average patent application takes 24.6 months to be approved.

Beware the Patent Marketing Company

Inventors should be wary of for-profit Invention Development Organizations (IDOs) that profess to help inventors with the patent and marketing process. While many of these companies are legitimate, some are not.

A legitimate IDO should make a detailed inquiry into the merits of your idea and give you a full range of options, which may or may not include the pursuit of patent protection. Some unscrupulous IDOs will steer you toward paying for patent protection for your idea with little regard for the value of any patent that may ultimately issue.

An IDO may recommend that you add ornamentation to your product in order to render it eligible for a design patent, but not explain to you the purpose or effect of such a change. Because design patents protect only the appearance of an article of manufacture, it is possible that minimal differences between similar designs can render each patentable. Therefore, even though you may ultimately receive a design patent for your product, the protection afforded by such a patent may be somewhat limited.

You should also be aware of the broad distinction between utility and design patents, and realize that a design patent may not give you the protection desired.

Inventing for Money – Step 3 – Prototype: Build a model or mock-up

In order to profit from your invention, you need to make others understand and, if possible, use the completed product. Remember, the value of your invention is proportional to the number of people who benefit from it. It must make the transition from “It looks good on paper” to “Wow! It really works!”

Sadly, this is the step in the process where many inventors get derailed.
In the early days, you could not get a patent without providing a physical sample or model of the invention. But in 1880 the USPTO changed the rules and no longer required a physical model of the device. Today, the patent application must contain sufficient disclosure to enable one of ordinary skill in the industry to make or practice the invention without undue experimentation. Thus, the invention must have enough specificity of design that an enabling disclosure can be prepared.

For Licensing, You Need A Working Model

While you do not need a physical prototype to secure a utility patent, you must have one if you hope to license or manufacture your device. The prototype is essential for several reasons.

  • It provides a three-dimensional physical representation of your two-dimensional drawings and/or photos.
  • It proves that your invention can be built and can work.
  • It gives a licensee the opportunity to envision manufacturing, packaging, and shipping your invention.

The key is that a prototype is worth a thousand dreams. Here’s what you need to do.

1. Make the prototype

If you are unable to do so yourself, you should hire a model maker to make a couple of prototypes of your invention. If at all possible, make at least three copies of the model, or if the invention is inexpensive make a dozen or so in different versions, as appropriate.

A quick online search will connect you with a variety of companies that specialize in helping inventors to create working models of their inventions. If you decide to partner with an inventors’ resource company, make sure that your invention is legally protected with a provisional patent and a non-disclosure agreement (NDA), and make sure that you get a guaranteed quote with no hidden costs. 

2. Protect your prototype

Once the prototype(s) are ready, you should make or buy cases for them to facilitate travel and display. Ideally, these should be hard plastic cases filled with foam rubber, cut so as to securely hold the prototypes in place. These will prove useful when you find yourself travelling to business meetings to pitch and demonstrate your invention to investors.

3. Photographs

Take high-resolution color photographs of the prototype. Take photos from every angle, and if there is a lid or other removable part, remove that part and show the revealed interior. You will use these as part of the presentation packet that you send out to buyers.

Inventing for Money – Step 4 – Prospect: Identify potential licensees of your idea

Identify Potential Licensees

You’ve protected your invention with a provisional patent. You’ve made a working prototype that you can use to demonstrate to an investor or licensee. You’ve studied the market and you’re convinced that you have a dynamite invention. The next step? You’ve decided not to venture, but to find a licensee to purchase the rights to your invention.

The first thing you need to do is identify the top two or three companies in the industry relevant to your invention. Generally, large, publicly owned companies are the safest ones to work with and will have the biggest distribution channels. However, the bigger the company, the greater is the internal inertia. You may find success with a smaller, more nimble company that is willing to move quickly and take greater risks.

There are a few keys parts to this step that will help you identify the companies that will pay the best price on the best terms for your invention. Chances are, you’ll be pitching your idea to a company that has deep pockets and the resources to effectively manufacture and market your invention.

Here are a few words about those big corporations that could either make you rich or drive you crazy. Or both.

It’s Not Easy Being Big

Life as a Fortune 500 company is not easy. The company’s huge size makes it hard to maneuver quickly. Ponderous bureaucracies built through years of focusing and creating efficiencies for a single product family or a single market can make development of new ideas exceedingly difficult.

Large companies are generally conservative. Investors in large corporations demand predictable investment returns, leaving little incentive for the corporations to make significant changes. Employees are often well compensated, with nice benefit and retirement packages, and there is little upside to taking individual risk or exerting extraordinary individual effort. Those entrepreneurial employees with visions of change and growth are often quickly squelched and either “reprogrammed” or banished from the corporate kingdom. Others give up thinking outside the box after repeatedly getting batted down by corporate planners, like so many fleas-in-training slamming against the lid of a Mason jar.

Besides the fixed inertia of the corporate culture, costs are often incredibly high in large corporations due to bloated overhead structures and high labor costs. Few brass-ring incentives exist in established corporations for motivating employees to exhibit the type of personal sacrifice that is commonplace in scrappy corporate startups. Where it’s expected at a new company to see founders pulling sequential all-nighters on their new projects, the vast majority of hours dedicated to any project in the large company setting are paid for at fully loaded hourly engineering rates. The lowest-level technicians in large companies, and in many companies even the rank and file engineers, are often covered by labor agreements negotiated based on core-business profitability models resulting in pay and benefit packages that could never be considered by a new startup. Surprisingly, it is often just too expensive for big corporations to consider new venture areas, especially where rapid development cycles are required.

Moving quickly is not just a cost problem in large organizations. New projects generally require long startup review cycles and budget plans corresponding to regular quarterly or annual windows. Getting a buy-in for a new idea requires layers of meetings, approvals, and proposals, and endless market testing.

The personal consequences of project failures in a big corporation can be professionally devastating for the individuals involved, who may have years of service or careers invested with the company. Individuals and small ventures can tread with abandon where professional managers and other bureaucrats would be terrified to go. Every step in the big company must be planned, scripted, budgeted and approved. Few employees in a large corporate structure are willing to take the individual risks often essential for the success of a new venture.

For these reasons, it is difficult for large companies to compete efficiently against nimble entrepreneurs in area of rapid innovation.

Corporations As Good Citizens

Beyond the issues of competitiveness, large publicly held corporations take great pains to avoid stealing ideas from others.

First of all, most large corporations try to operate ethically. That is not to say that such companies will avoid playing hardball or be anything but extremely competitive, but most well-run corporations will avoid lying, cheating, or stealing in the operation of their businesses. They do so because it is the right thing to do. Corporations are often owned by tens of thousands or more shareholders; such companies have a duty to the shareholders to operate in a way that is good for the company and good for those who have invested in the shares. Most boards of directors take this responsibility to heart and require that the company’s management operates with a high degree of ethics in all dealings, whether it be with employees, vendors, competitors, or the general public.

Businesses operate ethically because it makes good business sense. Companies that double-cross vendors, partners and employees eventually face consequences that negatively impact efficiency and profitability. A company that treats its employees poorly will eventually suffer labor problems. Businesses that steal ideas and inventions from those individuals and companies who seek partnering relationships with the company will eventually find that the flow of new ideas into their company is being diverted to the competition. Nowhere is it more true than in business that “what goes around comes around.”

Infringing upon the technology of others can be costly from a legal standpoint. No large company wants to be dragged before a jury by a small inventor claiming that the behemoth company stole his idea. Juries and reporters are just too unpredictable in these cases.

When you approach a big company, remember with whom you’re dealing. Think of it as like getting into a boat. When you step into a little speedboat you can start the engine and go. But when you walk up the gangway to a huge ocean liner, you’re entering a floating city that is built to travel in a straight line across vast oceans.

Find the Market Leaders

Most of the time, licensees will want to be the only company that manufacture and sell your product. If you are then going to have a single licensee of your product, it is only logical that you should chose the licensee that can sell most product and is most likely to provide you with the greatest return on your invention. You want to team with the top company in the relevant market.

If your product is a knee brace, then find the two or three companies that have the largest catalog of other related products, the largest distribution chains, and produce the greatest revenues from the sale of these products.

With the Internet, research of publicly held corporations is extremely easy. Visit a business website and within a few keystrokes you will find much more information than you will probably care to process. A good website for corporate research is freeedgar.com, where years of Security and Exchange Commission filings on every publicly held corporation can be easily searched. For a modest fee, information on privately held companies can be found using such resources as Dun & Bradstreet at dnb.com/us/.

Knowledge Is Power

Once you have identified the market and the leading potential licensees in that market, it is imperative that you take the time to prepare for selling the licensee on the benefits of your invention. This is one area where many novices fail. In order for a company to willingly risk resources on your product, you must convince the company that the rewards far outweigh the risks. The only way to convincingly make this argument is to thoroughly understand the risks and benefits and to be fully prepared when the time comes to present your case.

A key question in presenting to any potential licensee is to understand how the licensee will be able to make a product out of your idea.

Do Your Homework

Prepare for selling the licensee on the benefits of your invention. And be prepared to answer these questions:

  • How will your licensee use your invention?
  • What is the estimated wholesale price of the product?
  • What is the production cost?
  • What margins and volumes can be expected?
  • What do other similar companies pay in royalties for similar inventions (a patent attorney can help you with this; there are legal treatises that keep track of such data)?

It may be that none of these companies will ultimately be interested in licensing your invention, but it takes just as much work to negotiate a contract with poor company as it does a rich company – you might as well try the rich companies first.

Getting Mugged by a Big Corporation

One fear that paralyzes many new inventors is the specter of some 800-pound corporate gorilla from New York or Hong Kong or London finding out about their creative marvel and either quickly mass producing and selling the product at a significantly lower price, or in some devious way gaining rights to the technology and suppressing the invention.

There are some simple but critical steps you can take to protect your idea as you work to license your invention:

  • Keep careful records of your invention in an inventor’s notebook or file.
  • Conduct a patent search.
  • File provisional patent applications on new inventions, where possible, prior to disclosing them publicly.
  • Register copyrights where appropriate and use a TM logo.

When and if you choose to enter into a dialogue with an established company, make sure you:

  • Conduct discussions with all companies in writing. After oral discussions, enter discussion notes in your invention notebook.
  • Make liberal use of non-disclosure agreements.
  • Send a follow-up letter. It’s like a backdoor NDA stating this is what we discussed, and that the information is proprietary.

Inventing for Money – Step 5 – Promote: Prepare a pitch kit

You believe that your invention may be the greatest thing since sliced bread. Your invention is “patent pending”, and you have identified the companies that should be interested in licensing it.

Now you have to metamorphose from an inventor to a salesperson. You need to put together a pitch kit or sell package that will convince the most jaded Scrooge that your invention will make them richer than they already are. You cannot make false or foolish claims, but you cannot be shy.

If you aren’t comfortable approaching strangers and asking them to listen to your pitch, get some help or find a partner.

Ready? OK!

Your pitch kit should include:

  • A high-quality folder (many companies make folders for this purpose).
  • A presentation cover letter.
  • Your business card.
  • A short summary brochure sheet summarizing the invention, features, benefits and patent pending notice.
  • If it’s a hand-held gizmo, then a product sample that looks good and works flawlessly.
  • A set of high-quality color photos. Do not use homemade snapshots. If you’re not an expert photographer, hire a professional product photographer.

You’ll also want to set up a file of your prospects and contacts. You can use a spreadsheet like Excel or Access, or you can use low-tech index cards—it doesn’t matter as long as you keep track of:

Who you contacted
Where they are
When you contacted them
What was their response

Create a “tickler” file that will alert you when to make follow-up calls or emails.

Inventing for Money – Step 6 – Pitch: Make contact and sell

After making the informed decisions about which companies you want to license your product and creating your pitch kit, it’s time to contact the companies and get your foot in the door.

Brain Calibration

Before launching your licensee marketing effort it is absolutely critical that you understand the relationship between your product and the marketplace.

This is your mantra:

  • My invention provides value.
  • Because my invention provides value, people will pay money for it. Therefore, it is a valuable asset.
  • Like all valuable assets, it must be licensed only to companies who truly believe it is valuable and will treat it as such in their distribution.
  • My licensee needs my invention more than I need the licensee. New products are the lifeblood of every company. Without a continual flow of new products and services, companies grow stale, whither and die. My invention will bring opportunity to the company that can effectively exploit it.

Start at the Top

Nearly all manufacturing companies in America have a top operating officer in the company who is called the chief executive officer (CEO). In most companies, but not all, the CEO is also the corporate president. If you have a relationship with the CEO or executive of the company — either directly or through a relative, friend or some other contact—this is the best way to get your foot in the door.

The job of the CEO is to run the company in a way that is profitable for the shareholders. The CEO does this by delegating nearly all of the operational functions to a small group of senior executives who often further delegate to experts who actually do the work. Among those reporting to the CEO are the chief financial officer, who is responsible for the company’s accounting and financial functions, as well as a number of vice presidents in charge of marketing and sales, operations, manufacturing, information technology, and product development (this could also be R&D or engineering.)

The typical CEO works for twenty-five years or more, often starting at the bottom of the organizational chart and climbing the ladder one rung at a time, with each promotion passing scores of increasingly competent and qualified colleagues.

The road to CEO position is modern Darwinism in its purist form. Only the strongest survive the grueling climb to the top. The key qualities required to survive this ascent up the ladder provide the critical opening for the entrepreneur.

The nearly universal truth about successful CEOs is that almost to a fault, they are friendly people. The CEO’s climb to the top requires an extraordinary range of relationships with subordinates, vendors, customers, clients, colleagues, board members, and shareholders. The socially inept need not apply. The skill of building trust and friendship bonds cannot be faked and it cannot be trained. It has been my observation in working with scores of successful CEOs over the years that the successful CEO is inherently, intuitively, inescapably friendly, and just plain nice to be around. The trait is encoded in their DNA, as sure as hair color (for those that have any left) and shoe size. If you place a call to a CEO or extend your hand in greeting, the successful CEO is genetically incapable of being anything but friendly.

This is not to say that the successful CEO will coddle you or want to be your friend. What you should expect from the CEO or their assistant is a prompt, respectful, and businesslike response. If you don’t get one, it may be a sign that you are approaching a company that is in trouble.

Don’t be shy about using someone else’s introduction. Remember that the company needs you more than you need it and that the person providing a referral will be doing all three of you a favor.

Trade Shows

An excellent way to make contact is at industry trade shows. Aside from being places where marketing types congregate to launch new products and compare displays with competitors, trade shows are venues for exchanging business opportunities and discussing deals. Many company executives regularly attend major trade shows to meet with major customers, and are open and often eager at this time to discuss business opportunities, both in terms of sales and purchases.

It’s always best to schedule an appointment prior to the trade show, but if you don’t have a prior appointment, try going up to the booth on the first day and ask the booth manager if there is an executive attending the conference that you could schedule an appointment with to discuss a business opportunity. Leave a business card. Often the first day or two of the trade show are reserved for meeting with major customers and accounts, so be prepared to meet on the afternoon of the second to the last day of the show. For a show that lasts more than two or three days, most executives don’t stick around for the last day.

Unsolicited Proposals

If you can’t get an introduction to the CEO and the tradeshow timing or executive attendance doesn’t work out, the tried and true method of getting your foot in the door is to proverbially kick it in. The steps are quite simple; however, as in most fine arts, success is often in the execution.

Your first mission is to find out who the proper person in the company is to discuss your product. You want to get access to the highest executive in the company who can make a decision. By sending your design to a low-level employee, the burden is placed on this employee to sell the opportunity to his boss, who must then sell it to her boss, until someone high enough in the organization can make a decision. The likelihood that even a stupendous product will ever survive this tortuous journey up is almost nil.

So it is much better to start at the top with the CEO and enlist his or her help in finding the right person in the company to talk to.

Whether you make contact with a CEO on the phone or at a trade show, it is almost certain that the response will be, “Send me something.” Even if you are granted a personal interview, the CEO may request to see the material in advance so that he or she can be prepared for your meeting.

Here are the basic steps for every approach and pitch.

1. The letter

Write a letter to the CEO and include a couple of 8 x 10 color photos of your prototype. Send the letter by USPS express mail or Federal Express. Tell the CEO that you are a product designer (or whatever you call yourself) and that you have a product that would be perfect for his or her company. Photographs of your prototype are attached and you would like to schedule a meeting with him or her at their office to discuss the possibility of licensing the product. In the letter, inform the CEO that you will follow up by phone in a week or so to set up a meeting, and that you hope that he or she will have time to discuss the opportunity with you. A sample of this letter is attached in the appendix.

The fact that you have addressed the package to the CEO by name and sent it by express mail will ensure that the correspondence will receive special handling and routing in the company mailroom. The letter will likely be hand-delivered to the CEO’s administrative assistant who will open the letter and place it on the executive’s desk or in his basket.

The CEO may or may not read the letter, but will instinctively look at the photos. Your product is now at the top of the company.

The CEO will either be intrigued by the product or indifferent. But in either event, he or she will hand the letter back to the admin assistant and ask that it be routed to the appropriate department (product development, marketing, new business, R&D, legal, etc.) for handling. The job of the CEO is to delegate. Once the admin assistant has their hands on the letter for the second time, you have accomplished your initial mission of finding the right person in the organization to talk to about licensing your product.

Your next step is to follow up by phone with the CEO.

2. The follow-up call

In his autobiography, Lee Iacocca, who is unquestionably one of the great deal makers and sales personalities in the modern era, describes the pre-call anxiety that he would get as a young man having to make telephone calls. Clearly he was able to overcome his shyness.

The key to overcoming any shyness that you might have is to fully believe and internalize the following concept. Repeat this out loud as often as necessary:

“I don’t need the company as much as the company needs me.”

Knowledge is power, and since you have the knowledge of this disparity in relationship, you also have the power position in the call.

Call the company’s main number and ask for the CEO by name. One of three things will happen: the admin assistant will answer the phone; you will get the CEO’s voicemail; or the CEO will come on the line. You need to be prepared to handle each of these events.

If the admin assistant answers, ask to speak to the CEO by name. “Is Mr. Iacocca in, please?”

The admin will then screen the call. This is what they have been trained to do over many years of working their way up to the CEO’s desk.

“May I ask who is calling?”

“Yes, my name is Pat Jones. I sent Mr. Iacocca a Federal Express package last week containing photographs of an electric cup holder for possible license by Chrysler. I promised Mr. Iacocca that I would follow up this week by phone. When would it be convenient for me to talk with him?”

“Oh, Mr. Jones, thank you so much for calling, I do remember the package with the photographs.” (Enthusiasm and an excellent memory for details are two of the admin’s Darwinian survival skills that advanced her up the ladder to the top.) “Mr. Iacocca reviewed your photographs and forwarded them to our R&D department for further evaluation.”

“Wonderful, who heads that department?”

“Dr. Ann Walker heads our R&D department.”

“Thank you for your kind help, and please thank Mr. Iacocca for the attention to my product.”

If Mr. Iacocca answers the phone, the script will be very similar. “Mr. Iacocca, this is Pat Jones; I sent you an express mail package last week containing a couple of photographs of the electric cup holder for use in Chrysler’s new hybrid minivans. I promised in my transmittal letter that I would call you back this week to follow up. Do you recall seeing it?”

“Oh, Pat, thanks so much for calling [this is his DNA talking], I do have a vague memory of the photographs [probably true; most CEOs are overwhelmed with minutia and if he was busy that day he may have delegated the project before giving it his attention. Remember that his admin is the one who was job-screened for remembering details.] Very interesting idea, can you remind me how it works? [He’s curious now, but Mr. Iacocca has an engineering background and is a little embarrassed that he can’t recall the photographs.]”

“Of course, the cup holder has a flip-down cover and a twelve-volt heating/cooling element that automatically senses whether the drink should be heated or cooled and maintains the cup at a constant temperature.”

“Right, right, very clever. Well, I forwarded the package over to Bill Richards who heads up the hybrid minivan project. I’m sure if there is any interest, someone from legal will be giving you a call.”

“Thank you, Mr. Iacocca.”

The third and more difficult scenario is if you end up in Mr. Iacocca’s voicemail. You can leave a message, but depending on the style of the CEO you may or may not get a call back. Most CEOs always erring on the side of courtesy will ask their admin to either call you back or send you a non-committal letter. In any event, if you leave a voicemail message, you should keep calling back until you talk with someone live.

Assuming that you now have in hand the name of the person who may be able to take action, it is now time for step two.

Call the switchboard and ask for Dr. Walker.
“Dr. Walker, my name is Pat Jones, I just got off the phone with Mr. Iacocca [or “Mr. Iacocca’s office,” if you were referred by his admin—never make anything up] about an electric cup holder design that he reviewed for me. He told me that he has sent the design on to your office for further evaluation. I would like very much to stop by over the next week or so and show you an actual prototype, as well as demonstrate the sensor technology for you. Do you have forty-five minutes or so next week to look at the prototype with me?”

“Oh, hi. I remember the cup holder. I sent the package on to the interior trim manager, Bob Wilkins for a more detailed look.”

“Thank you.”

It’s time to smile and dial again.

“Mr. Wilkins, my name is Pat Jones. I’m following up after discussing my cup holder design with Mr. Iacocca and Dr. Walker. Dr. Walker told me that you have been assigned responsibility for evaluating my design. Can we get together next week sometime for me to show you the prototype and demonstrate the innovative sensor technology?”

“Mr. Iacocca is in on this? What did you say your name was?” More Darwinism—it’s a tall ladder and Wilkins has a short reach. “Sure, I can meet with you next week. I’ll have my assistant set up a time with you.”

Note that by starting at the top and working your way down, the project drops down the chain only just as low as it needs to go to where someone competent can make a decision on it.

Furthermore, by starting at the top, the approval path has been optimized. The right people in the chain have seen and delegated the materials. Dead-end approval paths have been avoided.

Finally, by starting at the top and dropping down the chain, everyone down the chain feels responsibility for some action, because each received a review action-item from their immediate supervisor.

Since you actually talked to the CEO you can drop his or her name wherever it serves your interest. The farther down the chain gravity takes you, the more valuable the initial contact.

The Pitch

When inventors are passionate, prepared, concise and knowledgeable, they are consistently more compelling than those who lack these qualities. Here are a few tips on how to make your pitch one that will successfully convey your vision and enthusiasm with potential licensees.

  • Assume a one-hour time allotment to pitch your idea. Your time allotment may be less be flexible.
  • If you must use PowerPoint, keep it short and informative. There is nothing more tedious than listening to someone recite the text that is displayed on a series of PowerPoint slides. A few slides at most to show pictures are all you need.
  • Your most important tools are your pictures and your prototype.
  • Be very prepared to answer questions about:
    • How the invention works
    • How it is built
    • The patent search that you did
    • The application filed and future applications planned
  • Know the licensee’s financial health, business prospects for selling the product, probable price point, manufacturing costs, profit margins, and customers.
  • Above all – be upbeat and positive! Convey a sense of fun and excitement, in addition to demonstrating your steel-trap mind. The combination is irresistible.
  • Welcome questions and be happy to answer them. If the person asking the question hated your idea, they wouldn’t bother asking a question!

Prepare a hands-on demo. The glitzy use of PowerPoint slides and video with music backgrounds is no substitute for your personal demonstration of your invention. You must have a well-built, working prototype, with prints demonstrating its use. If you will be presenting to a group, perhaps a PowerPoint presentation would be useful to show the pictures or charts, but keep it simple.

If you can afford it, carry a spare prototype, in case the bus driver drops and breaks your luggage.

The nature of the demo meeting in large part depends on the company you are visiting and the product you are offering. For example, the cup-holder meeting with Chrysler might take place in a small ten-person conference room with white boards on the walls and a projector on the table. Pat, the inventor, should take two working prototypes, several cups, two 12V battery sources (small transformers with the necessary cables and spares). Pat should also assume that his demo will completely fail due to a power brownout or some other catastrophe in Detroit, and be prepared to talk through the operation of the product using pictures or a simple PowerPoint slide deck.

Prior to going to the meeting you should spend many hours thinking and answering all possible questions about how the invention works, how it is built, the patent search that you did, the application filed, and future applications planned. You should also have done significant research on the licensee’s financial health, business prospects for selling the product, probable price point, manufacturing costs, profit margins and customers.

With this information in hand, you would then be prepared to cut a deal.

Inventing for Money – Step 7 – Paper: Negotiate and close the deal

Congratulations – you’ve made your presentation and they love your idea! Before you pop the champagne, it’s time to make some important decisions about the subject matter of your license and to negotiate a fair deal.

You need a qualified attorney. However, it is best to handle the negotiations yourself and keep your lawyer in the background. It will cost you much less and it’s better if you are personally involved with the people who may help you to become rich.

During the negotiations, it is important to have thick skin and to remember this is business and not personal.

Talk to the company reps, but DO NOT sign anything until your lawyer has reviewed it. Do not give in to pressure or promises. If you are handed a piece of paper, you will say, “Thank you-I’ll get back to you.”

Some important issues to resolve with your attorney include:

  • Subject matter: what is being licensed?
  • Is this license exclusive or non-exclusive?
  • What royalty rate is the company offering?
  • What is the upfront amount?
  • How long does the agreement last?
  • What further obligations does the inventor have?

The Term Sheet

The first document that you may be asked to sign is the “term sheet.” The best way to define term sheet is in to compare it to a marriage between two people. The term sheet is like getting engaged. The contract is like getting married.

The term sheet is a two- or three-page document that outlines a proposed agreement. It has language that clearly limits the obligations of both parties. Here is the opening paragraph of a typical term sheet.

This Term Sheet contains the basic terms to be included in a future definitive License Agreement for the Technology described below. The parties are the Inventor, having an address at ____________________ and the Company, having an address at _________________. The proposed transaction is subject to (i) the acceptance by both Company and Inventor of the principal terms as finally negotiated, and (ii) the negotiation, execution and delivery of a definitive License Agreement and any other agreements related thereto.

It is understood that this Term Sheet does not constitute a binding contract, and that the parties do not intend to be legally bound, unless and until a definitive License Agreement has been executed by both parties (except as expressly provided below concerning Publicity and Confidentiality). Unless and until a definitive License Agreement has been executed by both parties, either party is free to terminate further negotiations at any time, with or without cause.

Notice that there are two binding components in this term sheet: confidentiality and publicity. The company does not want this negotiation, or even the fact that they are talking to you, to be revealed to the public or to competitors. It’s a very fair condition.

Among inventors, the saying goes that “Businessmen negotiate the term sheet, lawyers negotiate the contract.” You should hammer out the basics of a deal yourself—but be sure to let your lawyer look at the term sheet before you sign it, just to make sure there are no sneaky clauses or conditions. When you are happy with your term sheet, you ask your lawyer to do the final contract negotiations.

The Contract

In contrast, the contract is lengthy, legalese-filled document that precisely defines each party’s rights and obligations. A contract must be negotiated by a lawyer, based on the provisions outlined in the term sheet.

Let’s review some of the issues you will need to review with your lawyer.

Subject Matter

Although after months of letters, phone calls, dog-and-pony shows, call back demonstrations, market strategy and engineering tooling meetings of all sorts, you would think that there could be absolutely no question as to what the heck it is that you are offering to license to the company. But properly defining the subject matter is absolutely key to your sanity over the coming years.

This is because the company must be certain that your invention is truly your property and is truly protected by patent.

The company will want to define the subject matter of the license very narrowly and will attempt to limit the coverage merely to the claims of any invention covered by a US patent that may issue in your name. The reason for this narrow coverage is that in the event that your patent fails to issue or that the claims arguably fail to create a monopoly in the product, the company will not have to pay a license royalty under the contract.

You, the inventor, will want to broadly define the subject matter of the license to include patents, trademarks, copyrights, drawings, prototypes, trade secrets, and know-how that not only protects the product, but also will assist the company in successfully manufacturing and selling the product. With this broad subject matter description, the company will have received significant value and be obligated to pay royalties after the patents expire and even if patents never actually issue.

Along the same lines, the company will want to broadly define any products covered by these licensed rights to include not only the invention that you so effectively prototyped and demonstrated, but every conceivably related magnificent gizmo in your workshop junk closet, and every related creation you devise in the future. The reason for this broad definition is that they want to avoid your going to one of their competitors in the future to sell a related product that might compete in the market place with the gizmo that they have licensed. Fair enough; however, unless you want to be forever co-opted by this licensee and unable to develop future products for other companies, it is important to pay attention to the product description being licensed here.

Exclusivity

An important threshold question that was discussed earlier in this book is whether the license to the company will be exclusive or nonexclusive to a single licensee. The reason that this is an early threshold question is that most companies will strongly desire an exclusive license to the product. This is especially true if the invention is an end product as opposed to an intermediate product.

For example, let’s look at the semiconductor equipment manufacturing business. A ubiquitous product made by several companies is the special tip of a wafer probe used for testing semiconductor wafers during the manufacturing process.

The inventor has developed an advanced probe tip having superior electrical and mechanical characteristics.

The first probe manufacturer he approached wanted an exclusive license. The inventor believed that the improvement was sufficiently important that if he signed up one company, he could ultimately get all of the probe manufacturing companies to use the improvement. So he held out for a non-exclusive deal. The first licensee caved in and signed. The other vendors soon fell in line to sign up.

This can happen, but the reality is that most deals with independent inventors are exclusive. This is not necessarily a disadvantageous relationship. Exclusive deals help create more of partnering bond between the company and the inventor. Often, on exclusive deals, as a kicker the inventor’s lawyer is able to negotiate some level of paid consulting work for the independent inventor (discussed more completely, later) to keep income flowing during the period following the payment of the advance prior to payment of the first royalty check. This type of arrangement is much harder to pull off with a nonexclusive license, since the inventor will be viewed as more of an adversarial party. Within certain industries, nonexclusive licenses are often thought of as “tolls to trolls”-payments that have to be made to inventors for the privilege of keeping up with competitors in a market, the way medieval travelers had to pay a toll to the munchkin who owned the only bridge across the river. Oversight and enforcement of non-exclusive licenses is a much more time consuming process as we will see in the final chapter of this book.

Royalty Rates

At first blush, the subject of royal rate would seem to be all about negotiating a number. Is it 4%? 8%? And the number is indeed important, and you need to know how to arrive at a fair rate. But there is more to the royalty term than the percentage rate, and quite frankly, some of these others factors will have a lot more impact on how much money you actually get to put in your pocket.

First of all is the question that we all learned to ask by the fourth grade: “Percentage of what?” There are at least three definitions that occasionally get tossed around when dealing with royalty; it’s critical to keep your eye on the ball here.

  1. Licensee Gross Sale Price. This definition is usually pretty easy to understand. The royalty rate is paid on some percentage of the total sale price that the licensee receives for the product.
  2. Licensee Net Profit. This term, when used, is almost always defined at the beginning of the contract in a section called Definitions. The reason a special definition is required for this term is that it is usually impossible for two lawyers to agree on what the word profit means unless they are using the exact same dictionary. When licensees try to base a royalty rate on profit, watch out, you could end up paying for golf tournaments and all sorts of unexpected marketing costs.
  3. Licensee Net Sale Price, which usually is defined to mean the Net Price charged by the licensee on the sale of products, after subtracting certain costs. These certain costs might include taxes, shipping, advertising, promotional, and a variety of other costs and charges. If you see the word “Net,” you know you need to call your lawyer pronto.

The bottom line is that the royalty rate should be based on the Licensee Gross Sale Price, not including actual shipping costs to the customer, and any taxes that are collected and must be paid to the government. This is very simple and easy for everyone to understand. If the licensee sells a bike containing your invention for $100, and you are entitled to a 5% royalty, you get five dollars. If the company collects taxes or charges for shipping, you are not entitled to a royalty on those two extra charges.

What Rate to Charge?

This is a subject that you will want to discuss with your attorney. Your goal is to get the maximum possible monetary value from your invention. At the same time, you do not want to demand a price that the licensee is unwilling to pay. Check these resources:

  • There are many law review articles and damage award treatises on this subject.
  • Search lawsuits for company an industry.
  • Work through the numbers. Does the requested rate leave a reasonable profit?
  • And, of course, ask the licensee to make you an offer.

Change of Rate for Failure of Patent

Your licensee wants full legal rights to your product. They do not want to be sued for infringement by a competitor, nor do they want to discover six months from now that your patent application has been denied.

Prior to agreeing to invest in a royalty-bearing invention, the potential licensee will try to get some feel for the likelihood of a monopoly being created. This due diligence might consist of performing a patent search on the prior art with respect to the invention, reviewing patent examination papers that might have already been generated by the patent office, and perhaps even consulting a patent attorney for an opinion on novelty and patentability.

Licensees might also try to include language in the license agreement that will reduce or eliminate license royalties on the product in the event that the licensor/inventor fails to secure appropriate monopoly protection. Such a royalty termination clause may not be fair to the licensor, since the company may continue to make and profit from the product and has now legally cut off royalties to the inventor. Furthermore, this solution introduces a disincentive for the company to support the licensor’s effort to secure a patent for the technology.

Here is an example of how a company can thwart an inventor’s efforts to secure a patent. It occurs when such an agreement exists between an individual inventor and a large-company licensee. The inventor files a patent application and then shortly thereafter enters into a licensing agreement with this licensee. Royalties are paid on schedule for about a year, and the licensee’s product is selling well.

A downturn in the economy results in a management change at the licensee company, and the new administration decides that they are not happy with the size of the royalty checks going to the inventor and the burden that these checks were placing on profitability. As part of the license agreement between the parties, a clause stated that in the event the patent application failed to mature into an issued patent, the royalty rate would drop from 5% to 1%.

The licensee, feeling that it had the market tightly locked up for the product, began to meddle with the patent application in an attempt to keep the application from issuing. How can they do this? One of the duties of a patent applicant is to keep the patent office appraised of any “prior art” that the inventor knows about that will be material to the examination of the application. So the licensee hires a law firm to dig up all of the prior art patents, technical papers and other publications. Having amassed a stash of prior art patents, the company mails these papers one at a time to the inventor. Each time the inventor receives one of these references, he or she is forced to read it with the patent attorney and submit it with the proper disclosure statement to the patent office.
The cost and time burden on the inventor can be debilitating.

Other Inventor Obligations

A consulting contract typically consists of a monthly retainer with a not-to-exceed-hours provision, if the inventor is actually called upon for assistance. For example, the contract might call for company to hire the inventor as a consultant for the six months following the acceptance of the agreement in order to assist in the manufacturing and marketing of the product. The consulting fee might consist of a monthly payment of $2,500 per month, and the inventor will make himself reasonable available to company, but not to exceed 20 hours per month. Additional hours may be mutually agreed upon at a rate of, say, $125 per hour.

Many companies really like the idea of having access to the inventor, to help solve problems as they develop. Others are willing to pay for the consulting, even though they do not expect to need the help, since as a consulting fee this payment is often viewed as a startup investment, rather than an actual inventor payout or license fee.