Negotiations begin very early on in the process of licensing an invention/idea. Most people are confused about this. They believe negotiations for a deal get underway only after a company expresses interest in licensing their product.
No -- not at all.
As soon as you come up with an invention/idea, you're either preparing to negotiate or failing to.
Let me explain.
If your strategy for commercialization is licensing, you must consider the attitude and expectations that potential licensees will have about working with inventors. Your hope, after all, is that one of these companies becomes your partner. (When done correctly, that's what licensing is all about -- forging a partnership.) So, it's important that you prepare accordingly from the very beginning.
Preparing to Negotiate Your Licensing Agreement Begins On Day 1
First, I recommend that you identify companies that may be interested in your invention by studying the marketplace. This is an extremely important step of the licensing process. Why? Because the insights you gain are priceless -- and hugely necessary for creating an effective roadmap.
Before I consider refining my initial concept with a specific licensee in mind, I do a background check on every company that seems like it might be a fit. I want to know whether the company has done a licensing deal before. Is it inventor-friendly? How many lawsuits has it been in with product developers? Information like this can be found by Googling the company's name followed by 'lawsuits' and 'complaints.' Look beyond the first few pages.
After I vet potential licensees, I use Google Patents to help me begin designing an effective strategy in regards to intellectual property. For example, at this point, I want to know if the company files a lot of patents. I type in the company's name to find out and compare its patenting rate to that of its competitors. You can get a sense of how important patent protection is to the company this way.
For example, let's say your invention is for the packaging industry. You would need to file intellectual property (such as a provisional patent application) that includes manufacturing know-how for it to truly have value and thus be licensable. Without this type of knowledge, the likelihood of you negotiating a licensing agreement is very low.
For most consumer products, having firsthand knowledge of manufacturing processes is not likely to be important. I estimate that for 99% of the licensing agreements we help our students negotiate from behind-the-scenes at my coaching company inventRight, that knowledge isn't required. What you do need is a well-written provisional patent application, meaning it includes workarounds and variations.
Next, I highly recommend using Google Image Search to help you hone in on your point of the difference in the marketplace. Pay attention to how similar products are marketed. This insight will be very helpful as you create your marketing material later on. It will also be relevant to the intellectual property you file.
Then, do a prior art search on your idea. Prior art is evidence that your invention already exists. It's very likely that you find patents that describe your invention exactly, or at least closely. Learn as much as you can from them. Do you have a genuine point of difference?
Searching for prior art can become very time-assuming. Still, I highly recommend that you teach yourself how to do it. (There are classes available online.) You can also hire someone to help you, or help you later on if what you discover merits further investigation. In my opinion, knowing how to do your own initial patent search is a must for every inventor.
Why is studying the prior art so important? Because you can use the insights you gain to strengthen your provisional patent application, which is one of the best tools when negotiating licensing agreements with small and even very large companies. Potential licensees will ask you about prior art. If you understand your point of difference and can expound on it, well -- you've just been given the opportunity to sell your invention.
Of the two, the Google Image Search is more important to me initially. I need to make sure my invention is actually new. If I cannot find my invention on the market, but it's described in a patent, then I try to find out why. Most likely, the invention was not manufacturable. If that's true in your case, you may be able to obtain patent protection on a manufacturing process. (And in doing so, establish a point of difference.)
More Strategies For Preparing to Negotiate a Licensing Agreement
Another strategy for negotiating a licensing agreement is creating market demand early on, which can take away risk. Unless you can prove market demand, companies will be hesitant to invest in projects that require a lot of time and energy. You can use evidence of market demand as leverage when negotiating.
In some industries, having a works-like looks-like prototype is an absolute must when negotiating. Having proof of concept moves negotiations forward more quickly, with confidence.
Having an idea of manufacturing costs can also really speed negotiations up. (One way of getting this information is by contacting a contract manufacturer based in the United States. Make sure to have them sign a non-disclosure agreement. Of course, because the contract manufacturer is based in the United States, costs will be higher.)
Earlier, I mentioned that well-written provisional patent applications include workarounds and variations. For example, consider including different materials and processes. If your intellectual property filing reflects the cheapest way of manufacturing your product, that helps your licensee make a decision. I believe that a well-written PPA gives you perceived ownership of your invention/idea and makes potential licensees less fearful. This gives you leverage and strength when negotiating.
There are other useful tools provided by the United States Patent & Trademark Office that you can use to help establish your ownership of your invention, including trademarks, copyrights, trade secrets, and design patents. Companies that sell online would love for you to have a copyright, design patent, and trademark to help them combat copycats and infringers.
Another useful tool when negotiating is a sell sheet. You need to present the benefit of your idea/invention to consumers in a way that potential licensees understand instantly. The way to achieve this is by closely studying their product line and their mission statement. You want your submission to look like it fits in with their current product line.
Remember: Attitudes About Licensing Products Differ
In my experience, the ideal company is one that has an entrepreneurial spirit. They welcome open innovation because they know that in order to stay competitive and out in front of their competition, they must keep looking for new ideas. This attitude is most prevalent in mid-size companies. Please note: A midsize company can still be a $100 million company with great distribution.
Generally, companies that have licensed numerous ideas seem to be fairer and more balanced. That's not surprising; they have experience. In the same vein, working with a company that has never licensed anything will require your patience, because you'll have to educate them along the way.
Over the years, I have found that negotiating with market leaders (very large companies) takes a little bit longer and is more difficult because they're extremely risk-averse. That makes sense when you consider scale. Implementing a new invention will be costly, most likely requiring capital to invest in new equipment.
The decisions you make about how to develop your invention idea -- including whether to file intellectual property, what kind of intellectual property to obtain and where, what to include in the intellectual property you file, prototyping, and your marketing material -- should be made with potential licensees in mind right from the start.