Forums: Discussions for entrepreneurs and small business.

Hello,

I am developing a new consumer product. I have located a successful inventor here in my area. He came through a referral and is very interested in working with me to bring this to market. He wants to work out a licensing agreement. What kind of terms are common and what should one look out for when licensing? I have read some on licensing deals already. He wants to manufacture and distribute the product. I do not want to loose full control and would like to possibly be involved in the future. What kind of royalty and minimum annual can one expect? I do have some figures in mind already. Thanks.

I`m a little confused. You are developing a product and licensing it to an inventor? Why not an actual manufacturer? Is he taking over the development? Is it patented, or is he planning to patent it? If you could elaborate a little then perhaps we can advise.

It sounds exciting!

RockSolid,

I`ve heard that an inventor seeking licensing can expect up to 25 percent of the cost of sale minus manufacturing costs. (If you are a "walk away" type of inventor you will probably see far less than 25%-cost of manufacturing)  If you are sharing the royalty with another inventor, then you`ll likely have to split the royalty in some manner. It`s all negotiable.  

There are a lot of factors that go into determining how much you can ask for:

• How far along is the product developed, i.e., how much "work" does the manufacturer have to do to get your product ready for market. How much do they have to spend? Is the real question.
• Is the product proven to carry a demand?
• Market size?
• How much will people pay for your product in relation to manufacturing expense?
• Competition?
• Level of protection of your intellectual property
• Duration of licensing agreement
• How much work will YOU do to help get your product to market?

If you have solid answers to these questions then you can start to gauge how much you can comfortably ask for. As with almost all negotiations, the first offer should make both parties blush.

As for control, that`s part of the agreement also. It`s up to you to decide how much control you want and if it will help you or hinder the process. Sometimes it can kill a deal altogether.

Whatever you decide to do. Remember that producing the product is usually the easy part. Lot`s of great products fail due to poor marketing. Selling  is where the real time and expense lies. Make sure that your "partner" is aware of what it takes to market your invention wisely.

Best of luck!    ~Eric

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~Eric
JE Design Group, LLC
If all you do is what you`ve done, then all you`ll get is what you`ve got.
www.jedesigngroup.com

I am back again. I am now into a draft of a license agreement and soon to sign a final. Does anyone know what kind of percentages are typical royalties. I have heard anywhere from 2-5% for an exclusive license. I do not have to invest any more of my own money to get the product to market. The company I am working with is going to front the costs of research, testing, and product launch through their own distribution channels. I do have a minimum annual royalty set in place. They will assume all the product liability. What other importand things should one look for? Thanks.

Rock Solid