New inventions must be manufactured, packaged, priced, and sold into the marketplace through a variety of channels including e-commerce, catalogs, retail stores, TV, direct response and more.

The inventor has one of two choices: either to venture her product (do it all herself) or to license her product to a company that will handle all of the above and pay her a small royalty or percentage for each of her products sold in the market (based on wholesale cost).

Let's focus today on the licensing option and; more specifically, on the licensing agreement – what it is and how it works.

Grab your free – License Agreement Resources – Cheat Sheet to the right.

What is a License Agreement?

A license agreement is a legal contract between an inventor (the licensor) and a company (the licensee).

In a license agreement, the inventor agrees to rent or ‘license' his intellectual property (IP) of his invention to the licensee . The IP being licensed may include pending or issued patents and associated trademarks (if any). The licensee is a company that manufactures, distributes, and sells similar or complementary product into the marketplace.

The license agreement is a win-win deal for both parties.

For the licensee, it gives them the legal right to manufacture, package, price and distribute a new product through their channels into the marketplace. A licensee like Allstar Products, via TV advertising and retail distribution, can quickly get a new product into thousands of retail stores because they have relationships with all the key retailers. When I licensed my product the Wonder Wallet, they were able to get it into over 10,000 retail stores within 6 months – garnering over $30,000,000 in product sales so far. Since the licensee, Allstar Products in this case, is able to grow their revenues with the new product and treat it as if it were their own product.

For the licensor, it is also a good deal. He is able to fully leverage the capital and marketing prowess of the licensee to widely distribute his product, quickly and easily, If, instead of licensing, he chose to venture the product, he would have to establish relationships with each retailer of interest. It could take many months to get his product into Target, Bed, Bath & Beyond, Walmart and others. By licensing his product, he does not have to manage all the headaches of the business, the licensee does that. If the product sells well, he will collect a lucrative royalty check every quarter and he may use his time however he chooses: invent other products, take vacations, or just relax.

How Does a License Agreement Work?

License agreements have many provisions and options. They can be exclusive or non-exclusive. They may allow the licensee to sell the product worldwide or just into specific countries or even market segments – only to marine equipment and boating, for example. They may or may not have “carve-outs” that allow the licensor to separately sell her product through specified channels in addition to the channels that are reserved for the licensee. For much more information on license agreements, click on the License Agreement Resources – Cheat Sheet below.

Here is a description of a typical license agreement.

The agreement includes an initial term (typically 1 year to maybe 18 months) and typically a provision whereby the agreement is automatically renewed annually thereafter unless either the licensee or the licensor provides written notice of desire to terminate the agreement. The licensee agrees to pay the licensor a royalty (generally between 3 – 7%) of each sales of the product for as long as the agreement is in effect. Royalties are most typically paid quarterly, 45 days after the end of the quarter.

Most agreements provide for worldwide sales (more royalties) of the product. This also gives the licensee incentive to market the product aggressively. If, for example, the royalty was 5%, the wholesale price were $10, and the licensee sold 50,000 units in one quarter, the licensor (inventor) would receive a royalty check for $25,000.

$10 X 50,000 X 5% = $25,000

A lucrative license agreement can provide a degree of personal freedom to the licensor that could never be achieved through a job. An attorney, on the partnership track, earning $350,000 – has a lot of perks and money, but he has little freedom. He may work 50 – 60 hour weeks, regularly working at night and on weekends. He only gets paid when he works. Long vacations are likely out of the picture.

But an inventor who has licensed her invention, that has lucrative sales in the market, may earn $350,000 in royalties without ever having to step foot into an office. She doesn't have to check with a boss before scheduling a 3 week trip to Australia, nor worry about being deluged in emails and work upon her return home.

Grab your free – License Agreement Resources – Cheat Sheet below.

Stay tuned.