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A practical guide for Canadians on how to profit from their inventions.
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A successful invention can be extremely profitable.
However, two things must happen for you to benefit:
- Your invention must be successful; and,
- You must play your cards right so that you make some money from it.
Note that there are two ways for inventors to lose:
- Their invention may not be successful; or
- Their invention may be successful, but the inventor may not get a fair share of the benefits.
This book is not about how to invent or what to invent.
This book is about how to avoid losing the opportunity to reap the full benefit of your invention, whatever that benefit might be.
Not every invention will make money. But when an invention is profitable, we believe that the inventor should reap a fair share of that profit.
Note that we talk about “inventions”. Inventions are a small portion of a wider group of ‘innovations’.
This book is about what steps you need to take to give yourself the best possible chance of profiting from your invention. If you do not take these steps, then you almost guarantee that you will not make money from your invention.
Over time, a successful invention may prove to be extremely valuable. However, all of that value can be lost by the inventor unless the inventor is very careful at the very beginning. The time when most inventors lose forever to profit from their invention is right at the beginning, before there is any proof whether the invention will be successful or not.
It is at the very beginning that you must be most prudent.
This guide will take you through the process of the early decisions that you must make to avoid losing your invention.
Inventions do not ‘sell themselves’. Despite what some inventors believe people do not beat a path to the door of the inventor of the next mousetrap.
Making money from an invention requires care, thought, skill, effort, and luck. However, with a little bit of research and planning you can vastly improve your chances of success, and reduce the chances of a painful expensive experience.
The amount of information that an inventor needs to research and learn can seem overwhelming. Furthermore, a lot of the information available is not terribly good, and very little of it is focused on the needs of Canadians which are not the same as the needs of Americans.
However, with some care and diligence it is possible to learn what you need to know, and in particular, so that you can engage trusted experts to assist you on an ‘as needed’ basis. Smart inventors do not try to do everything themselves; smart inventors know how to get the right expert help at reasonable cost.
This guide is intended to provide a framework for Canadian inventors in almost any field. Whether you are a backyard tinkerer or a university professor, and whether your invention is a new game, household product, or industrial device, computer, or pharmaceutical, the general principles in this guide will help you achieve your goals faster at less cost.
First, you need an invention.
Second, you need to make sure that is a valuable invention.
A lot of inventors make the mistake of assuming that every invention is valuable. That is not true. However, it is often very difficult to tell at the beginning whether it will or will not be valuable. Therefore, it is important to careful attention as you learn more about the prospects for the invention, and ultimately to separate the valuable from the less valuable. You must resist the temptation to invest your life savings in something that only a few people want, and even fewer will actually pay for just because it was your invention. If any invention will not be profitable, then you should stop pursuing it and invest your time and money in coming up with a new invention.
A word of advice: the most valuable inventions are not necessarily the ‘sexiest’ or most high profile. The most valuable inventions are often solve existing problems for existing businesses.
While it is always nice to invent something that is ‘fun’ or ‘cool’ the most valuable inventions often save people time or money or both. We are particularly keen on inventions that improve well-established commercial or industrial tools, systems, and processes. If people are already paying good money for something, they will pay handsomely for something that is better, faster, or cheaper. New is nice, but better and cheaper is worth money.
Conversely, if it is often very difficult to make money from new consumer products that are ‘cute’ or ‘nice to have’ but that do not make someone’s life much better. Retail products are a hard slog because it is hard to convince consumers to spend a lot of money to buy a new toy. So, if you have a choice, we recommend focusing your invention energies on industrial products and processes. If you can invent something that reduces costs for business, then you have a much higher chance of success than with a new ‘nice to have’ consumer product.
While you cannot come up with inventions on demand, you can increase your chances of inventing something worthwhile by focusing your energies. You are much more likely to invent if you have an active problem-seeking and problem-solving mindset. If you seek out areas of waste or inefficiency or unnecessarily high cost, and then actively seek to find ways to do these things better, faster or cheaper (either by yourself, or with others) you will vastly increase your chances of making a useful invention.
We will return to this subject of “it is new, but is it valuable enough to pursue?” later.
It is very hard to make money from an invention without some form of intellectual property protection.
Most stories of inventors who did not make money even though there invention was very successful, turn out to be stories about inventors who were ignorant of intellectual property laws and did not protect their invention properly at the very beginning.
You cannot wait for later. If you wait, you will probably lose the right to protect your invention. And that means, you will probably lose the right to make money from it.
You need to know about intellectual property very early in the process. If you go too far down the road with your invention without protecting it first, you may have permanently lost the ability to protect it.
It may be possible to make money from your invention without protecting it, but the decision to not protect the idea and disclose it to the public should only be taken with care after full deliberation. Therefore, you should start by keeping the invention secret and only disclosing it when you have taken proper safeguards.
Obviously you can keep your invention secret simply by not telling anyone about it, but that is of limited long term value. At some point, you will probably need to disclose it to someone, either to get help or to make or sell something.
In fact, excessive secrecy comes with a big cost. Every successful inventor gets help along the way from a team of people, and the sooner you start building that team the better.
The first tool for retaining an invention in confidence is to use a Confidentiality Agreement otherwise known as a Non-disclosure Agreement (often abbreviated as “an NDA”). Disclosure of an invention means telling someone else who does not owe you a duty of confidence about your invention. But be very careful: merely offering for sale a product which incorporates your invention can constitute disclosure especially in the United States.
A good NDA can be a very simple document. The key requirements are the NDA should:
- Be in writing.
- Clearly identify both the discloser and the recipient of information;
- Contain clear promises by the recipient:
- To keep the information received confidential, and,
- Not to use the information received except for the purpose of working with the discloser
- Be signed by the recipient of the information, and if possible, by you, the discloser.
You should get an NDA signed with each and every person that you disclose your invention to who does not otherwise owe you a duty of confidence, until you either a) file a patent application, or b) decide that you are not going to keep your invention secret or patent it.
Keep your signed NDAs in a proper filing system so that you can find them years later.
Generally, you do not need to get NDAs signed with lawyers and patent agents/attorneys because they owe you fiduciary obligations of confidence that are much ‘longer and stronger’ than any contractual duty of confidence. This is yet another reason to work with a properly licensed lawyer and patent agent/attorney, and not to use low cost patent or IP ‘advisors’ or ‘consultants’ who are not licensed.
A trade secret is a commercially valuable secret that you take every effort to keep secret. A trade secret can never be disclosed to the public, and therefore, a trade secret can never be patented. Sometimes, a trade secret can be a very effective, long lasting, and relatively economical strategy to protect an innovation (especially ones that are not patentable inventions).
For instance, some of the most famous trade secrets in history are food recipes. Think for instance of the formula for Coca Cola, or Colonel Saunders Kentucky Fried Chicken. The ‘secret sauce’ for their business really was kept secret.
Trade secrets work well for innovations which you use “behind closed doors” and which cannot be reverse engineered by customers after the product leaves your warehouse. This why formulas, recipes, and methods of manufacture are commonly protected by trade secrets (and not by patents).
Trade secrecy does not prevent a third party from independently developing the same innovation as you. Instead, trade secrecy protection is a web of contracts, with all of the parties who come into contact with your invention, obliging them to retain your secrets in confidence.
If you are going to adopt a trade secrecy strategy there are three keys to success:
- Use very well draft contracts (get a good lawyer to help);
- Pay attention to detail all of the time and never let your guard down and make sure that you always have a copy of a signed enforceable contract with each person who could be exposed to the secret; and
- Maintain a really vigilant corporate culture around the importance of keeping the trade secrets secret at all times in your company.
The second tool for protecting your invention that you must consider is patent protection. It may not be the right tool for your invention, but you need to consider it, early.
We strongly recommend that you read our companion eBook, Patents for Canadians, found on our website www.canadian-patent.ca for a more complete discussion of patents for inventors, including timelines and costs. Here we touch only on a few key features of patents and the things inventors most need to know. That book contains much more detail on the patent system.
It is very important to understand the differences between Utility Patents and Design Patents (which are called “Industrial Design Registrations” in Canada and Europe, and “design patents” in the United States).
Design protection is used to protect the non-functional, aesthetic features of an item. In other words, it protects “the look”. If you have designed something that looks “cool”, then design protection is the way to go. For instance, if you have develop a cool and unique looking piece of furniture, the basic concept (table, chair) is unlikely to be new, but you may be able to protect the look of your idea.
Generally, more designers and innovators should be considering design protection rather than utility patents. If you work in a field that involves tangible physical products, and the basic concept has been around for some time but you design a new better-looking model, then you should think of design protection. This applies whether you are designing new boats, cars, appliances, furniture, or housewares, to name just a few categories where designs can be really useful.
- Is quite affordable (approximately $2,000 per design per country);
- Is “country by country” protection;
- Has similar rules related to “novelty” and “grace periods” as apply to utility patents (see below).
A utility patent can cover an invention related to a product, system, method, process, or method of manufacture. Generally we think of patents protecting new ‘things’, although they can equally be used to protect a new the way of making something, or a new part or component of a bigger ‘thing’.
The essence of the patent bargain is that you must disclose your invention to the public in your patent application. In exchange, if your patent is granted (after you have made the disclosure) the allowed patent is a monopoly right to control the invention for 20 years.
Only certain things are patentable and many great ‘improvements’ are not.
Utility patents are a means to protect ‘new and not-obvious inventions’. Note that there are two key requirements:
- The invention must be new.
- Non-obviousness. The invention must be something that was not obvious to a person of ordinary skill in the art.
Many inventors are convinced that their invention is patentable because no one has previously sold precisely their product, but, their invention ends up not being patentable because “it was obvious”. Just because no one has sold your invention does not mean that your invention is patentable. Your invention must be something that was not obvious to a person of ordinary skill in the art.
A very good way to think about patents is to ask a question: have I a solved a problem that other people have been unable to solve, with a non-obvious solution? If the answer to that question is “yes”, then there is a good chance that the invention is patentable. This question is also useful because it focuses attention on valuable inventions that are smaller than ‘a whole new thing’ – valuable inventions can come in the form of a new part, or process, or component, even if the end product remains the same.
Patents are only obtained (granted) if they meet the criteria for a protectable invention (see above for the criteria of novelty and non-obviousness).
From invention to enforceable patent is an extended process which consists of
- drafting the main patent application;
- filing in various countries around the world; (patents are ‘country by country’);
- examination of our application by an examiner in each country, and
- if all objections of the examiner are ‘overcome’, allowance (grant), and
- ongoing payment of maintenance or annuity fees.
The process is long, and expensive. You should budget at least $10,000 for step (a), $5,000 per country for step (b), and $10,000+ for step (c). It is really important that you understand what you are getting into (and why) before you spend too much time and money on patents.
In our guide, Patents for Canadians, we discuss filing strategies including US provisonals, Patent Cooperation Treaty (PCT) filings, and where and when to file. Download your free copy from our website, www.canadian-patent.ca.
In Canada and the United States it is possible to patent an invention as long as:
- you file a patent application within 12 months of your first disclosure of the invention to the public (ie. someone who had not signed a non-disclosure agreement with you)
- no one else independently invents the invention (and either files a patent application or discloses their invention to the public) before you file your patent application.
This 12 month period is referred to as a grace period. However, generally we do not recommend that inventors intentionally take advantage of it. It is not a good practice to intentionally disclose your invention and then patent it later. You should use the grace period if you must, but not deliberately.
- There is no grace period in most other parts of the world. So, if you disclose your invention before you file your first patent application, then you have likely forever lost the right to patent in Europe, China, and most of the rest of the world; and
- All inventions made by third parties up to the date you file your patent will be cited against your patent. Your invention may have been new and not obvious when you made it, but may very well lack novelty or be obvious a year later.
We recommend that all inventors strongly consider filing a provisional patent application as quickly as possible. However, this does not mean that we recommend that they spend a fortune on patents.
A provisional patent application is not a full-blown patent. In technical terms it is “disclosure without claims”. As drafting the claims on a regular patent is very difficult and expensive, the fact that a provisional patent lacks claims can save a lot of time and money.
However, a provisional patent is not a ‘quick and dirty’ patent, and it certainly is not something that you ‘should’ do by yourself just because you can. Put it this way, if your invention is subsequently worth $10M, all $10M of value probably hangs on the quality of your provisional patent. That means it is worth at least $9M for someone to try to ‘rip it apart’ your provisional, and if they succeed, your entire patent portfolio may fall apart. It is rare that a first time inventor has the skills to draft a provisional patent that can withstand $9M of attack from good lawyers.
All of the value of your patents hangs off the thread of your first filing. A weak provisional means that all of your patent rights are at risk.
If your provisional patent is worth doing, it is worth doing right. A badly done provisional patent may cost you a fortune.
Recall that the premise of the patent system is “you disclose your invention, in exchange for a 20 year monopoly”. The key thing is that your patent application must contain enabling disclosure of your invention. Enabling disclosure means providing sufficient disclosure of the invention that a person of ordinary skill in the art can re-create the invention without significant further research.
A provisional patent lasts for 12 months. At the end of the twelve months you can let it expire. Or, you can file a full non-provisional patent application before the end of the twelve months that claims priority back to the day you filed the provisional patent.
In other words, provisional patents provide a relatively inexpensive (we change $3,000) way to ‘put a stake in the ground’ and get twelve months to figure out if your invention is valuable and if you want to pursue it further. We strongly recommend that you use these 12 months wisely as they go by very fast. You should use this time to aggressively seek out partners, investors, and market research to confirm or deny the value of the invention.
Many great business ideas are not patentable. In fact, there are many more ‘valuable innovations’ than there are ‘patentable inventions’.
Think, for instance, of a new restaurant concept (like McDonalds), or idea for a super-store for business products (Staples), or a new department store that sold at lower prices (Wal-Mart). None of these concepts would have been patentable and yet they developed into some of the great businesses of our time (with some of the great trademarks of our time).
Closer to home, our business is built on the idea providing ‘better, faster and cheaper’ advice for Canadian inventors but our business model (which includes giving away lots of great information for free) has been very successful is not patentable. Accordingly, it is really important to know when to patent and when not to.
Innovations without patents are not less valuable – but they are harder to commercialize. Generally, you need to build a successful business to make money from an unpatentable innovation, whereas the patent makes it possible to profit from an invention without building a business.
Another reason to be careful about over-emphasizing patents is that many patents end up costing far more to acquire than they add in value to the business. We strongly recommend against spending too much money on patents.
In addition, some patents are almost impossible to enforce. For instance, if infringement would only take place inside a factory, and you cannot tell from the finished product whether or not it has been built using an infringing process or tool, then it would be almost impossible to enforce the patent properly. Similarly, if it is possible for anyone with minimal tools or skills to infringe, then it is very hard to prevent infringement – it is simply not cost-effective to try to sue hundreds (or thousands) of folks who ‘pop of overnight’ and do not have established businesses.
As a result, we are big fans of the “file many provisionals, drop many” strategy for inventors. If you file a provisional patent application you preserve your right to potentially patent for 12 months, and during that time you can run around saying that your idea is ‘patent pending’ while your try to validate your invention, secure partners, and also try to figure out if your idea is patentable and what that protection will cost and whether the protection will be a net benefit for the business.
There is absolutely no shame in simply dropping the patent application at the end of the 12 months. Perhaps the idea is not patentable, or the invention is not valuable enough, or perhaps patenting would be too expensive, or perhaps you need to do further R&D to further develop the idea. All of these are great reasons for dropping a provisional patent application.
If you want to do something new in a field that other people have patented inventions in, it is important to confirm whether or not you can do what you want to do without infringing their patents. This applies whether you want to patent your invention or not, and this is called ensuring that you have “freedom to operate”. Essentially, a freedom to operate assessment answers the question “can I do what I want without infringing someone else’s patent”.
Just because no one is currently making or selling the product that you have in mind does not mean that making it will not infringe someone else’s patent rights. Someone may have a patent that covers some aspect of what you want to do, regardless of whether anyone is selling the product you want to sell.
If you are working in a rapidly evolving highly competitive industry (for instance, if you make cell phones), securing freedom to operate may be the most important thing you do; otherwise, you will face very challenging infringement litigation.
Even if you patent your own invention, your patent does not guarantee that you can use your own invention without infringing someone else’s patent. A patent is not a license to infringe other people’s patents – if using your invention requires using other people’s inventions, then you need a license from them before using your invention.
Copyrights are extremely important and powerful. They are very important for innovators, but not terribly useful for protecting inventions.
Copyrights are the rights which protect original works from copying. Copyrights do not protect ideas, they protect the specific expression of an idea. Copyright is what makes it illegal to make and distribute illegal downloads of movies and songs, while making it possible for anyone to write a new song and protect it. The reason that you need to subscribe for a Canadian subscription of Netflix is because of copyright laws.
Copyrights are the source of protection for anything ‘artistic’ but this includes software, video games, movies, blogs, newspapers, movies. They are extremely important for all of the ‘creative’ industries. For instance, copyright is the key set of rights that dictates who can do what on the internet.
Most copyright protection arises automatically without the need for expensive registration. However, copyrights are only as good as your willingness to enforce them – whether by way of take-down notices, or cease and desist letters, or infringement lawsuits.
The right to use (including publish and distribute) copyrighted works is transferred by licenses. So, whether you want to license our software, or sell subscriptions to ‘software as a service’, share a video, or use some open source software, the issue is ‘does the user have a license from the owner to do what they want to do’.
As a result, most innovators who developed copyrighted works rely heavily on getting good legal advice from lawyers with skill in the field.
Trademarks are words, logos, slogans, or the like which identify the goods and services of one provider and distinguish the source or origin of those goods or services from competitors’.
Trademarks are a fundamental component of good marketing. The most important aspects of choosing a trademark are to choose something that is a) not descriptive of your product, and b) not confusingly similar to someone else’s trademark. The best trademarks are highly imaginative coined terms.
Inventors rarely must trademark, and very rarely need to spend a fortune on trademarks, but one or two registrations on the primary mark associated with their invention can be an important part of building brand awareness and protection. In particular, a good trademark can prevent someone else from accidentally (or intentionally, although this is less common than inventors imagine) encroaching on their branding.
Ultimately, the value of the best businesses is most closely tied to their trademarks (think Apple), but inventors need to build a good business around a great brand.
The good news for inventors about trademarking is that there are very few deadlines for when you must register. Choose a great trademark, and then use it properly. The crucial thing is to keep good records of your ‘first use’ of the trademark, especially invoices, packing slips, and evidence of orders from first customers in each country.
You can learn much more about trademarks on our site, www.canadian-trademark.ca.
Protecting your invention was necessary in order to make money from it. But the mere fact that you have protected the invention most certainly does not mean that you will make money from it. There is much more to be done.
There are two things to remember:
- Many inventions, even the ones that you protect, are not ‘valuable’. It is only possible to make a lot of money from valuable ideas.
- Inventions do not sell themselves. The world most definitely does not beat a path to the door of the inventor of a better mousetrap. If the inventor of the mousetrap wants to make money, she needs to get out in the world and sell it.
The phrase that we use for ‘making money from an invention’ is ‘commercializing the invention’. Commercializing can encompass many different business models, from the traditional mode of ‘I will make it and I will sell it’, to all manner of outsourced manufacturing, distribution, marketing and selling, all the way to outright sale of the invention to a third party.
A particularly important means of commercialization is ‘licensing’.
Once you have protected your invention it is really important to return to the issue of whether your idea is valuable. Just because you have filed a patent application is no proof that your invention will make anyone money, and certainly not proof that it will make you money.
You must establish how many people are willing to pay how much for your invention.
There are lots of things that are ‘nice to have’, but the really valuable things that a lot of people ‘want to have, and are willing to pay for them’. The most successful inventors are brutally honest and continually asking themselves “do enough people want to pay enough for this invention?”
Often it is not possible to answer this question directly. Unless you have the finished product and have it on the market you may never know the actual answer. But, there are a lot of indirect clues along the way and we strongly recommend that you pay attention to these clues. What do other smart people in the industry think? Words of encouragement are really cheap. Are knowledgeable people willing to commit money, time and effort to the project?
It can be very humbling to hear that your invention is not as valuable as you thought. But better to be humbled than poor.
Sometimes, inventors receive big indirect clues that there invention is not as valuable as they think but they refuse to listen to them. For instance, some inventors find it impossible to raise money. Often, this is because investors either don’t believe that the invention is valuable enough or believe that the price for the investment is too high. Inventors need to listen to for these clues and think hard about what they signal; they don’t always need to believe them (investors can be wrong) but they are valuable nonetheless.
Once you have chosen the right level of protection for your invention, you absolutely must share it widely. Let everyone you can know about your invention. In particular, don’t just focus on potential consumers or end users of your product. Start aggressively sharing it with people or businesses that you might want to work with, and with investors.
Sharing your invention will bring all sorts of value – from prospective or reference customers to information about how to improve your invention, information about how to make, market and sell it, and information about who to work with.
It is particularly important to think about ‘partnering’ with people in the same or related industries because of their knowledge, skills, and money.
There are almost as many possible business models as there are businesses. However, there are a few key categories, and sometimes choosing the right business model for commercialization of your invention can be the single most important decision that you make as an inventor.
In all cases, it is really important to be humble about ‘what fraction of the pie’ should flow back to you, the inventor, and to share the spoils with others. No matter how good your invention is, it will probably need other people to make, market, distribute and sell it. If this is the case, you must leave a healthy amount of money on the table to encourage them to be interested in your product. A lot of inventors forget how important marketing, distribution and sales are, and try to claim too much of the retail pie. Greedy inventors rarely succeed. Most successful inventors make a lot of other people wealthy.
There are 3 broad categories of business model you should consider for bringing your invention to market:
- Make, market and sell the products;
- License the invention;
- Sell the invention.
The people that you sell to are not necessarily the end users of the product itself. For instance, if you sell to dealers, and they sell to their customers, the end users are their customers, not yours.
If you want to sell licenses to your invention, then your consumers are the licensees and what you are selling is licenses not products (or services). In turn, your licensees will sell the actual product or service to their customers, who may or may not be the end users.
This is the classic business model that most inventors think of first. They invent a new product (for instance, a new toy), and decide to go into business to make, market, distribute, and sell the toy at retail to the end buyers (consumers).
While this is a very common strategy, it is often a very hard one. In particular, it means taking on an enormous challenge of trying to build an entirely new business while also bringing a new invention to market – this is a case of trying to do about 10 things at once. There are an unfortunate number of inventors with garages full of unsold product.
One of the biggest challenges for the ‘make, market sell’ model is that it underestimates the enormous value of pre-existing distribution channels, and the difficulty of breaking into them with a sole product. For instance, most industries have an established ecosystem of manufacturers, wholesalers, distributors and retailers. Most of them have done business with each other for extended periods of time, and most of them do business with each other for more than one single product. This makes the entire buying, selling and distribution process more efficient. A new company, with only one product to sell, can face a very difficult and expensive time trying to break into an established industry without the right partners.
Also, one of the problems with make-market-sell is that it assumes that you will be as good at all other aspects of the business as you are at inventing. We have met a lot of inventors who are great inventors but not great salespeople. And in any event, should you not focus on your core competence? Maybe it would make more sense to focus on what you do best, and let others do what they are best at.
Think of it this way – there is an established industry for distributing coffee to office workplaces. These suppliers usually provide coffee, machines, tea, sugar, creamer, and all sorts of other related products (maybe even bottled or filtered water). If you invent a great new creamer, does it really make sense to try to build an entirely separate business to sell creamer to offices? Often, if does not. What you, as the inventor of the new creamer, need to do, is to partner with existing coffee-supply companies (either wholesalers or distributors or local retailers) to get your product in the hands of consumers.
When you license an invention, you remain the owner of the invention, but you grant certain rights to another person (your “partner”) to build their business making, using, or selling the invention or product or service.
For instance, trademark licenses are the foundation of all franchise systems, from Tim Hortons to Ford dealerships to Nurse Next Door (homecare services for seniors). The great power of franchising is that it marries strong national standards, brand, and marketing, with strong local partners who bring money and day to day management to ensure high quality local delivery of the product or service.
More broadly, you can conceptualize licensing as any business model in which you grant broad rights to a third party, who then runs their own business, and pays you for the privilege of incorporating your invention into their business. Many distributorships, especially with large territories (think countries and whole regions) are of this form, and often the licensee has a pre-existing business and simply brings your invention in to add to their product line.
The power of this business model comes from leveraging all of the other facets of the businesses of your licensees – from their offices and show rooms, to their sales and marketing teams, to their ability to buy and maintain inventory.
We strongly recommend that you consider some form of ‘licensing’ to build or compliment your business.
For instance, if the core market for you is Canada and the United States, then you should seriously consider finding partners to take your invention to market in other markets like the Middle East, Europe, or Asia.
Licenses are often structured on a ‘pay on success’ model such as royalties as a percent of revenue or per sale. Royalties are a very powerful way to align incentives between partners, so that both partners want to sell more and make more money.
When doing any deal with a royalty, it is important to consider contingencies. For instance, you should consider what happens if the licensee loses interest, or changes ownership, or is simply no good at selling your invention. We find that ‘guaranteed annual minimum’ royalties are often a very good idea.
Sometimes it is best to transfer full ownership of the invention to a third party, to let them ‘run with the ball’. This is often the case, for instance, when your invention works best with their products and services and thus you are dependent on them to bring your invention to market.
Sometimes you want to sell the invention for a fixed flat fee and move on, but often it is difficult to sell something new for a high price – you may be the only one who recognizes the full value of your invention and others may be more skeptical and nervous. When this is the case, consider the possibility of ‘selling the invention, while taking some or all of the purchase price in the form of a royalty back’. When you sell but take some or all of the purchase price in royalties you signal your confidence in the value of the invention and often retain a lot more upside if the invention takes off.
It is foolish to try to build a business all by yourself, and it is foolish to try to commercialize an invention from scratch by yourself. Commercializing an invention is complex with a lot of moving pieces. Successful inventors learn what they can do best, and get others involved with the project to help with everything else. Lone wolf inventors are rarely very successful.
This ‘partnership imperative’ will help drive the choice of the best business model for commercializing your invention.
An inventor who wants to retain 100% of the pie will find that their pie is very, very small.
It is very important to understand that partners contribute value to the project – often as much or more value than the original invention itself, and successful inventors learn to share the pie in order to grow the pie.
Generally inventors tend to underestimate the value of other aspects of the ‘product to market’ lifecycle, especially distribution and retail. It does not matter how great your idea is, if it does not wind up in front of potential buyers, at a convenient time, attractive price, and presented in a way that they can understand the benefits of the invention, then it will not sell. Therefore, you should think long and hard about how you can find and excite the right distribution and retail partners about your product. We strongly recommend that you spend a considerable amount of time thinking about who has the right access to the ultimate buyers of your invention, and figuring out how to partner with these folks.
Of course, successful partnership does not mean blind love. It is really important to make sure that your partners make and honour their commitments.
Clients often ask how they can ‘get in the door’ with potential partners. For instance, they know that there is a big multinational firm that “should” be interested in their invention, but they do not know how to approach that firm.
Our advice is that most definitely should not simply ‘throw your idea over the fence’. You need to make a personal connection with the right person to talk to (who may not be the decision maker, but may be the gatekeeper). And then you need to sell them on the idea – why should they go to bat for you? Why should they recommend that the firm pursue your invention and do business with you?
It takes research and persistence to find the right person to talk to. Do as much research as possible to try to find the right person to talk to. Ask other people. Ask other inventors, and ask other people who have any knowledge of the firm (whether they are inside or outside the firm). The bigger the firm the harder you have to dig to find the right door to go in. And remember, the first person that you are directed to may not be the right one.
One you have found the right person to talk to, it takes persistence and skill to sell your invention to them. Most inventors spend too much time pitching how great their invention is, and not nearly enough time pitching why a) the invention is good for the firm, and b) why the invention is good for the person you are talking to. What is in it for the individual and their firm? Why should they invest scarce resources in your idea? How can you convince them that your invention is going to make them (not you, them) rich and successful?
The more that you know about every facet of their industry the easier it is to tailor your pitch to their needs. Again, remember, you need to sell them on why they should “buy” into your invention; your invention will not sell itself, and they will need to be shown clear, compelling evidence why the risk is low for them and the upside great.
In fact, this is wise advice for every inventor – the more you know about the industry, the better. You need to know about who the players are, who makes what margins on what, where the bottlenecks are, competitive pressures and challenges … Even if you want to sell your invention outright, the more you know about the industry, the better.
Bringing an invention to market is usually expensive. We strongly recommend that inventors recognize the potential costs upfront and try to find “investors” to share the burden. You may have to give up some of the pie, but that is better than retaining 100% of the pie and then running out of money before you can make any sales. In particular, good intellectual property protection (patents and designs especially) can be expensive, and yet it can be the difference between success and failure. Get help!
The good thing is that there are many ways to get investors involved with your invention, and you need not lose control. Of course, you need to leave enough on the table so that your investors can be properly rewarded for the risk that they are taking, but that does not mean that you will no longer also make money.
One of the most popular ways of raising money is to sell shares in a corporation that you have transferred the invention to. However, this is by no means the only way to raise money, and often is not the best. For instance, we are fans of ‘royalty based repayments’ of both principal and ‘upside’ for investors. Royalty-based agreements can, in some cases, but much simpler and easier to negotiate and monitor for both investors and inventors.
We also very strongly recommend trying to ‘raise money’ from savvy people in your industry that you can ‘partner with’. Often, they contribute their knowledge, skills and effort in lieu of actual cash or as part of their total investment.
Maybe they are a marketing firm, or are a manufacturer who will make the product, or a retailer who will sell the product. Often, these folks have much more to gain than more conventional investors, and thus are much easier to persuade to invest. They also bring to the table something that is much more important than money – they bring knowledge of the industry and consumers. If they can help answer the key question of ‘who is willing to pay how much for this invention, and why’? then they may be invaluable.
Royalty-based agreements with these partners can be very effective: they make a specific contribution to getting the invention to market, and in exchange get a share of revenues.
In fact, we believe so strongly in the importance of industry-savvy partners that we believe that if you cannot interest sophisticated industry players to partner with you in some meaningful fashion, then you have to seriously worry whether your invention is valuable enough to pursue.
Lastly, it is important to remember that sometimes these partners can make money ‘as a result of your invention’ that is not directly tied to the profits of your business. This can be a very powerful motivator for them and you should take advantage of it where possible. For instance, a retailer may want to carry your product not because the product itself will be very profitable to sell, but because it will draw customers into their stores who will buy many other things. Think, for instance, of a cool new tool sold just before Father’s Day – the sales of the tool may not be super lucrative for the retailer, but if it brings a lot of customers into the store, these customers might buy many other things.
Remember: If you are raising money you must comply with applicable securities regulation. If you are going to raise money from investors, then you must get advice from a lawyer familiar with financing new ventures.
Be very careful about most ‘invention brokers’. There are a lot of people who pretend to be successful invention brokers, but there are very few ethical and successful ones.
In our experience, a very large number of invention brokers are unscrupulous or simply not very good. The unscrupulous firms exist by charging inventors large fees (usually many smaller fees in small steps over time, and usually for such things as ‘marketing materials’ or ‘presentation kits’). These firms rarely, if ever, make much money from successful brokerage of the invention to buyers.
In particular, if someone purports to broker inventions in all fields or a very wide range of fields then you should be very skeptical. Brokering requires expertise, contacts and effort, and no one can be good at everything and know everyone. Being a good invention broker is very hard work.
Because invention brokering is unlicensed (it is not a recognized profession) there are very low barriers to entry and many of the firms that market their services the most aggressively (with lots of ads and websites) are not very good. There are some good invention brokers, but there are many charlatans. The bad apples are especially common in the field of representing new inventors with new consumer products. They will milk you for fees.
If you are going to engage an invention broker, we strongly recommend that you do extensive due diligence on them, that you ask a lot of questions, that you only work with someone with demonstrated expertise in the industry that your invention is in, and that you are very careful about paying fees upfront especially for things like ‘marketing packages’ before they present your invention to prospective buyers.
Also, you should be very careful about working with patent ‘consultants’ recommended to you by invention brokers. Many of these consultants are unlicensed. Being a patent agent/attorney is hard – it requires time, effort, skill and constant training. Good patent agents/attorneys cost real money. Someone who offers to patent your invention for a very low fee is likely not very good and unscrupulous. Be very careful!
Inventing is important. But so too are many other aspects of business, and two aspects of business that many inventors do not consider enough are marketing and sales. No invention, no matter how great, sells itself. You must work hard to attract the attention of potential buyers (marketing) and then convince them to purchase (sales).
These principles apply regardless of whether you are trying to sell your products, or sell licenses or sell your invention. If you are trying to sell licenses, then you need to market and sell licenses – they will not sell themselves. Thus, even if you plan to license or sell your invention, you need to do market research to determine potential buyers, and then package, market, and sell the license or invention to the right buyers.
Astute readers will note how closely this rule that you must ‘value the other aspects of the business besides invention’ ties in with our command to partner with other people in your industry, and the best ways to ‘raise money’. Often, an invention is like a seed – and it takes a lot of other things to make the seed turn into a tree (water, sunlight, …). The seed is important, but so too are all the other things that go into a successful business. It is therefore, really important for inventors to be humble about what they bring to the table, and how much they need to leave on the table for other partners (provided that those partners deliver).