It's often said that "creative people are seldom good business people." You can draw your own conclusions, but it's true that many inventors or "idea" people simply don't want to establish a company to manufacture and sell their products. They have no interest in becoming administrators, to say nothing of the problems involved in raising the necessary financing for a new company with an unproven product.

However, by "licensing" inventions to an existing manufacturer, you are theoretically free to head for the beach and wait for your royalty checks to be delivered.

But first things first. Let's look at a few definitions:

License

: The grant of permission to use intellectual property (your invention), whether it is patented or not.

Licensor

: The seller of the license (you, the inventor).

Licensee

: The buyer (hopefully, an existing manufacturer).

Royalty

: The payment made by the licensee to the licensor. It can be a lump sum, a fixed sum per year, a percentage of sales or a fixed amount per item sold.

At what stage in your product's development do you want to license it? In essence, the more fully-developed, protected (patented) and proven your invention is, the greater value it has to a potential licensee.

For example, a product still in the simple "idea" stage has very little value. But a filed U.S. patent application, a working model, an issued U.S. patent or commercial marketing success all raise the value of your product in the eyes of a potential licensee.

Think of your idea as an automobile. Four tires alone won't get you around town--you'll need a chassis, engine, driveline, body, etc. That's why you can buy four tires for a couple hundred dollars, while a complete car will cost you more than $5,000.

In essence, your "idea" just represents the tires to a potential licensee. The more you can do with your invention to get it to the "driveable" stage, the more it will be worth and the greater will be your chances of finding someone interested in licensing it.

At this point, you are probably wondering, "What's in it for me? How much can I expect to receive in royalties from my invention?"

There is no simple answer--in actual terms it can range from nothing if the product is only meagerly successful to millions if your invention is truly a breakthrough.

However, there is one "rule of thumb." One-quarter to one-third of the net profits should go to the licensor.

The catch here is that royalties are almost never expressed as percentages of "profits." Profits are too elusive and can be disguised or diverted easily.

Therefore, most royalties are based upon a percentage of the manufacturer's net sales price and in that regard, typically run between two and 10 percent. Again, these are generalizations and can vary widely in practice.

You might also wonder why the licensee is entitled to the majority of the profits. It's quite simple--he's the person who is risking his money and time to try to sell your invention.

If you've reached the point where you are ready to look for licensees, it's time for an essential task:

Go to Your Public Library

You must now begin doing some "research" (a five-dollar word for "looking things up"). This research will provide you with a list of potential licensees. Set aside plenty of time for this duty. The more potential licensees you can identify, the greater your chances of success.

Visit the library with a couple hundred 3x5 cards. If you use those up and must buy more, be happy to know that there are so many potential licensees for your invention.

While researching, you must identify:

Which companies can sell your invention

--for example, if you have a new dog collar invention, try to identify all companies that sell products through pet shops. If your product is an industrial component, try to identify the companies that might use it.

Which companies can make your invention

--for example, if your dog collar is likely to be made from extruded plastic, try to identify the companies that are in the business of extruding plastics.

Your first priority is the companies that can sell your invention. As a generalization, if a company is selling products to a certain market and they are presented with a promising new invention, they'll figure out how to either manufacture it themselves or have it done outside for them.

Next issue

--More on the licensing process for inventors.


John W. Morehead is a licensing executive and president of Technology Search International, Inc. He may be reach at 500 East Higgins Road, Elk Grove Village, Illinois 60007-1437. The phone number is (847) 593-2111. Mr. Morehead may be faxed at (847) 593-2182.