How to Determine When to License Your Idea to Another Company

patent-and-produce-or-license

Q: I am a design engineer that has created what I believe to be a revolutionary design, but I know very little about patenting the design, raising venture capital, building production capacity and ramping up a company. What advice would you offer someone like me?

A: It is hard to give good advice on so little information, but here are a couple of thoughts:

  1. If you are a great design engineer and your skills are all focused on design, then you should consider staying in your sweet spot and just be a design company that creates great designs.  You can then license your design to product companies that already have the infrastructure in place to produce and market the product and you get paid some money down plus a royalty on sales, all per your negotiation (get a good negotiator to help you.) You can run a bit of an auction to find the “partner” that gives you the best deal and has the best chance of delivering on its sales estimates. Be sure to negotiate some guaranteed level of sales that triggers a dissolution in case they do not sell your product. See the How to Negotiate a License and Royalty Agreement for more tips regarding the licensing and royalty agreement process. Additionally you can purchase and download a Royalty Agreement legal template to get you started.
  2. Another possibility is to try to patent your product and then produce it through a contract manufacturer so that you can get your invention to market, but at least you are not investing in new infrastructure that already exists. One of my golden rules of entrepreneurship is to never invest in infrastructure that already exists. This is not my favorite option because you are still creating too many capabilities that all carry substantial risk.
  3. If you have no experience starting a company, running a company or raising venture capital for building asset-intensive production capacity, then the option of building a company around your one design (beware a one-product company) is not good, since the likelihood of someone funding your new production company is extremely slim.

The good news is that a services company (such as a design company) should not need any outside funding or at least very little if you keep your expenses low. As you can probably tell, the “create and then license” option is my favorite option for a skilled designer with little operations experience. Be sure to pick a partner that you can trust to take it to market and beware of unequal yoking.

Recommended Resources:

Document Downloads:

Ask an Expert:

Training:

  • Venture Academy (and in particular the Harvard Business School case study and video featuring Palm Computing and a licensing agreement put together with a software entrepreneur)
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About Wade Myers

Wade has founded or co-founded, invested in, and been a director of over 25 companies and has completed 55 financing and M&A transactions. His previous work experience includes the Boston Consulting Group and Mobil Corporation. Wade also served as an Airborne Ranger in the US Army where he was a decorated veteran of the Gulf War. He is a Baker Scholar graduate of Harvard’s MBA program and is married with five children.

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