In my last post, Inventors Success: Partnership and Trust, I mentioned that successful inventors must partner with others (and trust) them to be successful. Now I’ll touch on licensing again with a bit of a different perspective from previous blogs:
Today’s topic: Another Perspective on Licensing: Risk versus Reward
In an earlier blog on licensing, I described that often it is the inventor who ruins the deal by being a bit too greedy. Let’s dig into licensing and compare it to a typical business partnership and consider risk versus reward of both enterprises.
Typical Business Partnership
Many business enterprises are comprised of several entrepreneurs who jointly pool their capital resources, hoping to build a successful business enterprise that none could do separately. By example, 5 entrepreneurs each might invest $100,000 into a business partnership with the hope/expectation they would recoup that investment in three years and then enjoy an ongoing return on investment (ROI) each month thereafter. As such, each is a 20% stakeholder and would receive 20% of profits (if any) over time.
Three results might occur:
- The business fails taking all of the entrepreneurs’ investments with it
- The business succeeds and grows, but much slower than expected
- The business succeeds and grows better than expected
In scenario 1, the partners lose everything they invested – an unfortunate circumstance. In scenario 2, the partners recoup their investment and get some ROI, but it might be disappointing. Perhaps they might have done better investing the risk capital into the stock market instead. Scenario 3 is the outcome everyone hopes for – a nice payout over time and good ROI.
Typical Licensing Agreement Partnership
In a typical product licensing deal there are two types of partners: risk-sharing and non-risk-sharing. The licensee company and any partners it works comprise the former category and the inventor is in the latter category.
If the venture is successful, who will get the lion’s share of the profits – the most reward? The risk-sharing partners of course! That is how it should be in balancing risk to reward. The inventor invests no capital, only his or her IP in the form of patents and trademarks.
The same three outcome scenarios could result as the typical business partnership. If the enterprise fails, the risk-sharing partners will lose all of the capital they have invested. The inventor loses nothing – all rights revert back to the inventor and he or she may choose to take their IP to a different licensee. They own all rights to their product and associated patents and trademarks.
If the venture succeeds and the inventor gets, for example, a 5% royalty of all sales, it is a sweet deal.
If the overall profit margin were 25% (just an example), effectively the inventor is reaping 20% of all profits (5% royalty) without taking any capital risk. Also, the inventor may be paid royalties on all sales for the life of the patent.
That is a great business deal. For the inventor, the risk to reward factor is fantastic.