Reasons to Patent: Licensing

Over the next few weeks, I will be publishing a series of newsletter emails all about different reasons you may want to pursue a patent in your business.

One of the most common misconceptions I come across is that the only way a patent can bring value to your business is through legal enforcement (suing a competitor for patent infringement). In reality, there are many, many other reasons to file a patent that are far more relevant to newer, smaller businesses (such as technology startups).

For example, one great reason to consider filing a patent application is to enable your business to more easily and effectively pursue a licensing arrangement. In its most basic form, licensing is where you give another business (or multiple businesses) the right to use your protected intellectual property in exchange for a portion of the revenue they generate with your IP. It is possible to enter into a license as soon as you file an initial patent application (when you are still in the “patent pending” phase) so licensing can be a great way to bring early revenue into your business.

Certain business models work better with licensing than others, but if you have your heart set on manufacturing and selling your product entirely yourself, it may still be possible to pursue one or more licensees. For example, you might give the exclusive rights to another jurisdiction (for example a country your business won’t be pursuing in the near term). Alternatively, if your patent is applicable to more than one industry, you could provide the licensing rights to another company exclusively in an industry or application area that isn’t core to your business.

At The IP Link, we help our clients understand the value a patent application might bring to their business BEFORE they start spending tens of thousands or even hundreds of thousands of dollars on their legal fees with a lawyer. If you’re considering licensing, but haven’t filed a patent yet, or if you want help digging into all the different ways a patent could bring value to your business, let’s talk!

Make sure you’re subscribed to learn more about the benefits of a patent from a business perspective over the next few weeks!

Bring in extra revenue from your patents and other intellectual property through licensing

One of the best reasons to carefully consider filing a patent application is because it could give your business one or more additional revenue streams.  Depending on your industry, the quality and breadth of your patent or other intellectual property (IP), and your approach, such licensing revenue could be significant!

Table of Contents

What is Licensing?
Can I pursue a license and still continue to operate my business?
How do I license my IP?
Case Study in Licensing Course Content
Case Study in Licensing Patents

What is Licensing

Licensing can mean different things in different contexts, but in this post I will be focussing on the idea of licensing your intellectual property to another business.  Licensing the right to use software to an end user (such as with an End User License Agreement like those we often click “accept” on) is similar but won’t be the focus of this post.

In an IP license, typically a licensor would give a licensee the right to use their IP in exchange for one or more forms of payment.  These payments might include upfront payments, milestone payments, or royalty payments, among others.  Upfront payments are amounts that the licensee would pay to the licensor right when the license agreement is signed.  Milestone payments would become due when certain objectives are achieved.  These might include issuance of one or more licensed patents, first commercial sale of the product, or any number of other achievements.  Royalty payments would give you, as the licensor, a percentage of the revenue the licensee makes based on sales of any products that utilize the licensed IP.  Royalties are important for you to get a portion of the profits generated with your idea, especially if it does really well!

Can I pursue a license and still continue to operate my business?

Thankfully, it doesn’t have to be one or the other.  In many cases, creators try to license their IP exclusively.  This means one party would have the exclusive right to use the IP that is being licensed and you, as the licensor, would be contractually obligated not to give any other party the right to use it.  An exclusive license would typically require higher payments than a non-exclusive arrangement (all else being the same) and could be easier to put in place since you only need to deal with one other company.

If you still want the ability to build your own business, one option could be to consider licensing your IP in another country that your business doesn’t currently operate in (presuming you have a patent or other IP in that country).  This would allow you to still offer an exclusive license, the exclusivity would just be limited to that country.  If you have a platform technology or IP that could be useful in more than one industry, another option would be to give an exclusive right to use the IP only in one specific industry.  This would allow you to keep using your IP in your industry, or even to put multiple licenses in place that are each exclusive to different industries.

These approaches can work really well for startup companies because the additional revenue that comes from licensing in another country or industry can be used to build your core business.  This revenue might come in more quickly than your own sales if the company you partner with has already established manufacturing and distribution channels, for example.

How do I license my IP?

One of the most important things to consider when starting to license your IP is whether or not there is a market for your product.  Who wants it?  Who are the end users?  How many of them have told you directly that they can’t live without your product?  How many have already paid for it?  If you answered “no one”, “I don’t know”, “zero” and “zero”, you will want to work on this first.  If you need help, please get in touch!

The next thing to consider is how your customers currently solve this problem.  What companies do they currently give their hard earned money to in exchange for the solution to their problem?  You might want to consider approaching these companies with the opportunity to license your IP!  Answering the questions above and building a list of prospective licensees are key components to the first phase of the licensing service we offer at The IP Link.  Part of this first phase also includes finding the right individuals to approach within the companies on your list, and prioritizing who to approach first.

If this initial market research comes back positive and it looks like there are quite a few viable options for potential licensees, then it usually makes sense to invest resources into phase two.  This phase lays the groundwork for presenting your IP in an intriguing way.  We typically draft a succinct one page brochure that highlights the benefits and advantages of your intellectual property, also noting the current protection status and how to get in touch for more information.  For certain industries it makes sense to prepare a PDF that can be emailed to potential prospects, but it also usually helps to have a web version of this brochure including a video (if possible).  Here is an example of a web-brochure that we put together for a client who needed help licensing his marine oil extraction patents:

Now that you have an awesome marketing document and you know who to contact first, it’s time to start meeting new people and building relationships!  This is typically the hardest phase of licensing your IP and can take the most time and effort.  But, at least you already have a list of companies that could be great licensees, and a few people at each of those companies that you can attempt to get in touch with.  This typically takes the form of online networking, cold calling, emailing, and in some cases attending networking events or relevant conferences (budget permitting).

If you are successful in finding one or more interested licensees, before you realize it, you will be well into the negotiation phase (phase 4).  Before proposing any actual financial terms (for example through a license term sheet), it will be important to put resources towards estimating the value of your intellectual property and researching comparable license deals that have been executed in your industry.  This financial research will help you avoid being taken advantage of or getting a bad deal.

Rather than jumping right in with a full license agreement, it typically makes more sense to start with a one or two page license term sheet.  Such a document will help accelerate the negotiation with your prospective licensee by ensuring that you and they agree on the most important points of the planned relationship, before getting bogged down with extensive legalese.

Once the license term sheet is agreed upon, a full license agreement should be negotiated and put in place.  Now the real work of actually commercializing the product can begin!  Ideally the new product is a success, in which case you will also want to monitor sales to ensure the proper royalties are being paid.

To summarize these phases:

  1. Develop a list of prospective licensees.
  2. Create a licensing opportunity brochure.
  3. Contact prospective licensees to explore the market and generate interest in licensing.
  4. If a company becomes interested in licensing, research previously executed licenses of comparable technologies to determine a negotiating starting point for financial terms.
  5. Once a license term sheet has been executed, source, draft and customize a license agreement.
  6. Negotiate the full license agreement.
  7. Monitor the arrangement to ensure compliance.

Case Study in Licensing Course Content

Perhaps you already have a decent relationship with the right person in a company that could be a perfect licensee for your IP.  I recently worked with a client who had developed his own management training course with a far better approach and process than existing courses.  Such a course might not be patentable, but would be protected by copyright, which can also be licensed.

Amazingly, through various local tech entrepreneurship events, my client had met and built a relationship with the president of a recruitment and HR consulting firm with a specialization in leadership coaching and training.  Having a relationship like this can really help you fast-track your licensing efforts.  In this case, the client I mentioned was able to skip phases 1-3 and jump right into phase 4!  In most cases, finding the right partner (phase 3) is the hardest step, so his success in this should really be commended.

The IP Link helped him source and draft a suitable license agreement that wasn’t too overbearing.  Part of this involved thinking through potential scenarios that could arise (both good and bad) and laying out the process for how such situations could be dealt with.

Case Study in Licensing Patents

In another project, I worked with a client who had filed two patent applications years prior to working with me (although The IP Link also helps with this) and one of these patents had been accepted by the patent office (issued).  This client had also built his business up to the point where he was manufacturing and selling the product (online and at trade shows).  Although not necessary to license a patent, his patent had already issued and he had concrete positive market feedback, both of which helped market the licensing opportunity.  

The IP Link helped him develop a contact list, a licensing opportunity brochure, and (as of the publication of this post) we are currently in the process of contacting potential licensees and generating interest!

Please get in touch if you have any additional questions about licensing or need help with it!

Should you be considering patents? What value could they bring?

Yes, I would argue that these days, nearly all companies should be investing time and money into evaluating the potential for their business to derive value from filing one or more patents.

The results of such an evaluation or assessment may suggest that you don’t currently have anything patentable, or they may suggest that you should be filing a patent application right away.  Most, if not all businesses could likely receive an issued patent.  Business processes are patentable, for example.  As is software in many cases, including various aspects of artificial intelligence/machine learning innovations.  

The important first step is to carefully consider if and what you might be able to protect through patent protection and if your application might reasonably be accepted by the patent office.  Once this question is answered, it is important to give thought to whether or not it would bring more value to your business than it costs.

Patents can bring value to a business right away once an application is filed, not just once they are accepted or issued by the patent office (which can be a long, expensive process).  For example, as soon as you file any patent application, such as a United States Provisional, you can claim “patent pending” status – even before the actual patent office ever looks at it.  Having a patent application in the works might bring value to your business in any of the following ways:

1. Reduced need for confidentiality.  Filing an application will allow you to share your idea more freely without the need to worry that someone else might steal your idea.  Such worries are likely unjustified but can still affect your peace of mind.  Peace of mind is valuable, even if it relates to unjustified worries.  Additionally, filing an application will help ensure you don’t lose the ability to file your patent due to your own public disclosure.

2. Improved credibility.  Filing a patent application will bring additional credibility to your business in the eyes of your competitors, customers, potential partners, employees, shareholders and investors.  Many people aren’t entirely clear on exactly what “patent pending” means, so they just assume that they shouldn’t mess with you (stay tuned for a future post).  Even those who do know what it means will think twice, at least until your patent publishes, allowing them to evaluate its potential for themselves.

3. Investor confidence.  Although I mentioned investors in the above point, the value that a patent application can bring to your ability to seek investment is significant enough that it deserves its own point.  I have no doubt that if you are pursuing investment, you will be asked what is preventing your competition (especially any large entrenched players) from building their own version of your product once you prove that it is viable.  The answer to this question isn’t always patent protection, but if not, you should make sure you have a well thought out explanation as to why you aren’t pursuing patent protection, which only comes from carefully considering it.

4. Additional revenue, potentially in the short term.  Licensing your patent allows you to give another company the right to use your patent in exchange for various payments (royalties, upfront payments, milestone payments, etc.).  Believe it or not, depending on your invention and the quality of your patent, there are many companies that are open to licensing even before your patent issues.  It may make sense to pursue licensing as your business’s primary model.  Even if you intend to market and sell your invention through your business, there may be other industries or jurisdictions where your patent could be of value.  It is possible to license the right to use your patent only in such specific industries or jurisdictions, reserving exclusivity to your business in your core area.  The nice thing about pursuing such a model is that it could bring in significant revenue much sooner than sales of your own products and could help fund the development of your core business.

5. Increased net worth.  Intangible assets such as patents and other forms of intellectual property can increase the financial net worth of your business.  The financial value of your company is important if you are considering an investment round, a sale of your company or a portion of it, or an initial public offering (IPO).  Even if such events are a long way off, building your patent portfolio now can significantly add to the eventual valuation of your company.

6. Competitive differentiation. If your competitors are developing similar technologies, filing patent applications early can limit your competitors’ ability to file similar patents.  Over the long term, this could also reduce the chances that you are infringing on others’ patents.  As such, you may not need to license the right to use other company’s patents as much as you otherwise would.  Even better, your competition won’t be able to use or sell any of your issued patents (patents that are approved by the patent office) without a license from you.

7. Better negotiating position.  If you are considering a partnership such as a co-development, manufacturing, or distribution arrangement, having one or more patents can greatly improve your ability to negotiate a more beneficial agreement for your company.  In the example of a co-development agreement, if you have clear background intellectual property, your potential partner will likely need to a license in order to proceed with the collaboration.  This could change the distribution of revenues received for the new joint technology or result in another benefit or concession back to you.

Almost all these benefits are available to you as soon as you submit your first patent application.  Once your patent is accepted by the patent office, and issues, it is even easier to extract value in most of these ways.  For example, a company considering licensing your patent would be more likely to move forward and may pay higher royalties if your patent has issued than if it is still in the application phase.  The other “benefit” that comes from having your patent issue, is that you can now finally sue anyone who is using your invention (infringing), although I would argue that it will probably be far more of a headache than a benefit to your company if you pursue this path.  You are much more likely to extract value by constructively pursuing a licensing arrangement.  Comment below if you know of any other ways patents can bring value that I may have missed and contact us if you need help evaluating the potential for your business to derive value from filing one or more patents!