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From provisional to permanent patent - Q & A

Albert calls in to ask the Sloans how to make the transfer from having a provisional patent to a permanent one.

Rich Sloan: And Jeff, what do you say we go right to the Nation?

Jeff Sloan: Love that.

Rich Sloan:  Let's open up the phone lines.  We're going to Albert out of San Jose, California.  Welcome to the show, Albert.

Albert:  Hey, thank you, guys.

Rich Sloan:  Right on.  Welcome to the show.  What can we help you with?

Albert:  Greeting you from the Silicon Valley.  Hey, I completed the year of my provisional patent.

Rich Sloan:  Okay.

Albert:  And I'm not quite ready to move on to the other portion of the patent.

Rich Sloan:  The full patent, yes.

Albert:  Full patent.  Right.  Right.  And that's got to do somewhat with monies and everything.  What do I do on the interim?

Jeff Sloan: Well, here's the thing.  First, let's clarify.  So you filed what's called a provisional patent application about a year ago.

Albert:  Right.

Rich Sloan:  And explain what that is, Jeff.

Jeff Sloan: A little over a year ago.  Right, I will.  A little over a year ago, right?

Albert:  Yes.

Jeff Sloan: Okay.  And what a provisional patent application does for you, it does not provide any patent coverage whatsoever.  What a provisional application does -- and it's about $150 to file roughly.  You file it directly with the USPTO, the U.S. Patent and Trademark Office.  You can find out information about it at StartupNation, of course, or go to USPTO.gov.  You can download some information on how to file a provisional application. 

But basically, what it does is it gives you nothing more than a filing date, effectively, back to the date at which you filed the provisional application.  Once you file the real patent application, the full-blown application, once that patent is granted, your rights will go back all the way until the date at which you filed the provisional application.  So essentially, it's an opportunity to gain a year --

Albert:  Okay.

Jeff Sloan: -- of additional protection.  That's what it is.  If you're still interested in getting coverage, I'd speak to a good intellectual property attorney.  You may have jeopardized some rights, but maybe not, depending on what the ultimate idea is that you're going to file under the real application.  But I would think it's time to talk to an intellectual property attorney if you want to try to maintain some opportunity for protection on this idea.

Albert:  Yes.

Rich Sloan:   And Jeff, if his primary issue is being able to finance that patent --

Albert:  Yes.

Rich Sloan:  -- in other words, the transition to the formal patent application, one thing that he might be able to do is get someone to pay him a little money in exchange for any future revenue generated by products from that patent.  Explain how that works.

Jeff Sloan: Like, through the royalties, yeah.  It's almost like selling futures on the royalty stream.  Should you be successful in getting that intellectual property licensed to a company who will make and sell that device and pay royalty back to you --

Albert:  Yes.

Jeff Sloan: -- what you can do is go to someone and say, Look, give me 5 grand, 10 grand or a million bucks, whatever it is, and depending on how good the idea is, and in exchange, I will give you, Mr. or Mrs. or Miss Investor, a percentage of the royalties that are going to be paid to me.

Albert:  Okay.

Jeff Sloan: And, obviously, it's got to make economic sense, so you've got to make a case for what you think those royalties will be.  You've got to make a case for how likely it is that you'll be able to get that licensed so that you can --

Albert:  Uh-huh.

Jeff Sloan: -- convey confidence to the investor that there's something there in the future.

Albert:  Uh-huh.

Jeff Sloan: You know, then you take that money that the investor puts up and you file that full application.  One thing that helps in this case is if you can't afford to do a patent search and a patent ability opinion, if you can pay for that, which is going to run you roughly around $1,000 -- if you can get started with that, that's going to help your case with an investor a lot in getting additional funds because it indicates the likelihood of whether or not you're going to get coverage.

Albert:  Okay.  Okay.  And I have done a patent search.  I have spoken with a IP attorney and all of those things.  So now it's just a matter of -- okay.  Let me ask you a question.  Let me ask you this question.  Is there some sort of, I guess, royalties calculator?  And I'm just kind of throwing that out there.  You speak about possibly receiving royalties on the ideal.  Is there some sort of calculator or something to determine what royalties would look like?

Jeff Sloan: Yeah.  I don't know if there's a calculator, but, you know, I think that we ought to throw one up at StartupNation. 

Albert:  Really?

Jeff Sloan: Yeah, that's a really good idea.  We'll put a little formula up for that and you can even plug in some numbers and maybe run a little wizard.  We'll see how good the back of house guys at the StartupNation website are.

Rich Sloan:  They're pretty good, Jeff.

Jeff Sloan: They're pretty good.  They're pretty challenged, too.  We've got lots of great ideas.  We're trying to execute them all at the same time.  But, here's the way you can do it.  You can run your own math.  Essentially, the way a royalty stream is generated is you license the idea to a company who sells the device into the marketplace.  They typically sell it at a wholesale price.  And off that wholesale price, or what they call their net selling price, they are going to pay essentially a 5-, maybe 10-, maybe 15-percent royalty, but a good rule of thumb is around 5 percent off the net selling price. 

Now the net selling price is calculated -- and I'll run a little calculation here to keep this simple, but first an explanation.  The net selling price is the price at which the company that's making and selling this device sells to whoever it is they're selling it to:  the market, a retailer, a business-to-business transaction, whatever it may be.

Rich Sloan:  Keep it simple, Jeff.

Jeff Sloan: They pay the price, and then what happens is you subtract off any cost of shipping, any cost of taxes, any cost for returns, and then you come up with a net selling price, and then you get 5 percent of that.  So, let's run some quick math.  Let's say that this thing sells off the manufacturer's end of line for 10 bucks.  Let's just say it's 12 bucks, so we'll make this really easy math.  Let's say it sells at 12 bucks.  It goes out the door at $12.  That's the wholesale price at which the manufacturer sells it to whoever they're selling it to.  Off the $12, let's say there are $2 in costs; shipping, taxes, a percentage for returns, etc.  So that takes you down to $10.  Now, you're going to get 5 percent off that $10.  Five percent off that $10.  Rich?

Rich Sloan:  50 cent.

Jeff Sloan: There you go.  Fifty cents.  So you get 50 cents off of every unit that sells.

Rich Sloan:  Of course, I just gave you the name of a rapper too:  50 Cent.  But that's --

Jeff Sloan: I don't know who that is.

Rich Sloan:  Yeah.

Jeff Sloan: But that's another story.

Rich Sloan:  Fifty cents it is.

Jeff Sloan: Yes, 50 cents it is.  So that's how it's calculated right there.  And then what you do, of course, is you go out to the marketplace.  You do really good research and you see how big the market is.  If you project selling a million units a year, let's just say, and you can give confidence to the investor, you give the reasons why you believe you can sell a million units a year.  Maybe even the manufacturer has done some research on that and they're giving you that forecasting information, and that's even better.

Rich Sloan:  I got the number for you, Jeff.

Jeff Sloan: What did we get?

Rich Sloan:  Fifty G's.

Jeff Sloan: Fifty G's.  Are you thinking right now? 

Rich Sloan:  It is 50 grand. 

Jeff Sloan: Fifty G's.  Now, hold it.  If you're selling a million units.

Rich Sloan:  Yeah. 

Jeff Sloan: A hundred thousand would be 10 percent, half of that.  That's how my brain works, right?

Rich Sloan:  Yeah.

Jeff Sloan: There you go. 

Rich Sloan:  So, but Jeff, the key thing here is you said a million and if it were 1.2 million, it would end up being 50 thousand, because you've got to take off that $200,000, right?

Jeff Sloan: Yeah.  And actually, I want you to run your math again.  I thought you were kidding me.  Do you really know what the number is?

Rich Sloan:   Five percent of a million?

Jeff Sloan: No, you get five percent off the $10 selling price.  The net selling price --

Rich Sloan:  Right.

Jeff Sloan: -- is 50 cents.

Rich Sloan:  Right.

Jeff Sloan: If you're getting 50 cents --

Rich Sloan:  Times a million units.

Jeff Sloan:  -- times a million units.

Rich Sloan:  Right. 

Jeff Sloan:  $500,000.

Rich Sloan:  Oh, that's right.

Jeff Sloan: There you go.  Let me do --

Rich Sloan:   Okay.

Jeff Sloan: -- the math.  Let me do the math.  You take us out to the break.  See, he's got a great pitch, doesn't he?  He can do a great pitch to an investor on $500,000 in revenue.  I was worried for him at $50,000.  The upside wasn't that exciting relative to the risk-taking.  There you go.  That's how it's done.

Rich Sloan:  StartupNation Radio and some good mathematics.  Coming back with more.  Stick with us.