Q: I am a 48-year old man with no business experience in terms of starting a company, raising capital, or running a company, but I’ve invented a product that I feel would be very useful for every bathroom in the U.S. and I believe it would be a huge hit. Any recommendations on what I should do next?
A: First of all, I would not recommend trying to start up a company to produce one product. “One-hit wonders” rarely make a company, regardless of how good the product is. The inefficiency of building a company and manufacturing capacity around one product that is not yet proven is far too risky in my opinion. Add to that the fact that you have not built a company before and the risk is compounded significantly.
I recommend that you consider the following steps:
- Do some research and create a list of all bathroom products companies that may be interested in acquiring your product to add to their existing product portfolio. This could range from bathroom fixture companies such as Kohler or American Standard, to bathroom cleaning products companies such as Clorox to bathroom accessory companies such as Rubbermaid, or other product companies depending on whatever is the best fit with your product idea. Ideally, you will have 10 – 20 companies or more to work with at this point.
- Next, do some initial calling around to the new product development staff or product management staff at your target companies and introduce yourself and your general concept. At this point, you will want to hold your idea close to your chest, so your goal is to test the different targets’ receptiveness to doing a royalty-based product acquisition deal with you (explained below.)
- Next, once you’ve narrowed your targets down based upon their accessibility and interest level (hopefully you still have quite a few targets at this point), I would recommend having them sign a confidentiality agreement so you can explain your idea in more detail.
- Once you have several finalist targets that are very interested in your idea and you’ve discussed some potential deal structures, they will be anxious to see a prototype of your product. Up to this point you’ve managed your risk very well in that all you’ve invested is some of your time in the process, but now is the time to risk having a product prototype developed.
- For the development of a prototype, I would suggest using an outsourced prototype development company. There are a whole host of companies and specialty engineering shops that develop prototypes. Depending on the cost, complexity and timing, you may want to develop one for each of your finalist target companies or just two so that you can keep one and one is shared with each of the finalist targets in turn. I would never have just one produced, because something will typically happen to your only prototype just when you need to demonstrate it the most!
- Once you’ve got the prototype production well underway, you will want to consider the timing of patenting your design. The more unique the design, the more important it is to patent your product earlier in the process, potentially before sharing your prototype. If your design is not very unique and easy to duplicate, you may be better served to save the approximately $15,000 to get it patented and leave that to the target company that you sell your idea to.
- Once you’ve settled your prototype and patent decisions, you can share your prototypes with the target companies, but be sure to give them a deadline to return it so that you create a sense of urgency and so that they have less time with your design. The more unique your design, the less time they should have with it, even to the extent of never letting it out of our sight, which would mean you stay onsite with your design and their product evaluation team until a decision is reached regarding their interest to pursue. This might entail an all-day meeting or even a few days.
- Once you’ve garnered interest from one or more target companies (ideally three or four) you will want to work with them all at the same time to get the best deal on your design. At this point, you will most likely be negotiating for a royalty deal that includes some cash up front, plus a royalty percentage on all sales thereafter. You will want to have some minimum royalty payouts in your agreement to make sure that they do not just buy your product idea and then shelve it. One way to protect yourself from this scenario is to have the ability to regain the rights to your invention if their do not meet the minimum payouts to you.
- You will get a better deal if there are multiple companies in pursuit of your product and if they know that there are other companies in pursuit. This creates a sense of urgency and scarcity and will hopefully result in a bidding war as they attempt to outbid each other. During this phase of negotiations, you will want a good attorney and advisors to help you craft a royalty agreement that protects you.
- Once your deal is done and your partner company is using their significant scale and resources to get your product to market, its time to think up another product idea, since that seems to be your strength.
- Non-Disclosure Agreement Template (a.k.a. NDA or Confidentiality Agreement)
- License and Royalty Agreement Template
- License and Royalty Agreement Kit (includes several agreements, a negotiating template, an NDA template, etc.)