Free Inventor's Kit



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Getting Paid for Your Invention

How to Make an Effective License Agreement

You already knew you have a great invention. Knowing this has driven you to find a company interested in taking your idea further. And now, through your hard work, or the work of a licensing agent, you have found a company that also thinks your invention is great! This is a fantastic place to be. And at this point you are probably asking: “Now what”?


The next step is to make some type of agreement between you and the company. The purpose of the agreement would be to give them the right to manufacture and sell your invention, in exchange for them paying you royalties. This type of agreement is commonly called a “licensing agreement”, and it is an essential part of getting paid for your invention.


Not only is this an essential step, but it is also a critical step that must be taken carefully.

There are many traps or pitfalls that can occur when making a licensing agreement that every inventor needs to be aware of. It is for this reason that it is necessary for you to be assisted by people skilled and knowledgeable in licensing agreements. And the purpose of this article is to discuss not only the basics of licensing agreements, but also to discuss one of the most common traps, so that you are ready to enter this phase of commercializing your invention with the proper amount of caution.


There are two main types of licensing agreements: exclusive and non-exclusive. In other words, will this company be the only one you allow to produce your invention? If so, you are talking about an exclusive licensing agreement. On the other hand, a non-exclusive license agreement means that when you are finished making a deal with this company, you can turn around and look for other companies to also make deals with.


Non-exclusive license agreements can really help a product spread. For example, when Phillips invented the compact disc, they licensed their technology to many different companies who were then allowed to produce compact disc players. This allowed the compact disc to virtually replace phonograph records within a few short years.


For an individual inventor, however, it will usually be the case that the company you are dealing with will want an exclusive license. It is for this reason that you must be aware of the biggest trap that inventors fall into: what if the company that you have given an exclusive license to “shelves” your idea.


Consider this example. You are talking to XYZ corp about licensing your invention. They really love the idea, and project $10 million in sales over the next three years, and think they will probably sell even more after that. It all sounds great, so you enter into an exclusive agreement with XYZ corp to manufacture your invention. The term of the agreement is for the life of the patent. They agree to pay you a 10% royalty on all products they sell. This seems great. If all goes according to plan, you will rake in a cool million dollars in royalties!


But what happens if a year goes by and XYZ hasn’t produced or sold your product. How much do they owe you in royalties? Two years go by? Five years go by? The answer in all cases is zero. They don’t owe you anything unless they produce the invention. If they never produce it, they never owe you a single dollar.


Now if years go by and they never do anything with your invention, you are free to find another company to work on your invention or to do it on your own, right? Wrong. If you made the agreement described above, you would be effectively stuck. All of the rights to produce your invention would belong to XYZ, for the life of the patent – which is forever in the world of an invention. And XYZ would never have to pay you a penny for it!


To avoid this trap, there are several things you can do:


1. Limit the term: This is the most basic defense against a company that doesn’t follow through with producing your invention. If the contract is for a limited term, at some point the rights will revert back to you.


2. Get money up front: Sometimes money obtained upon signing the contract is called “good faith money”. That is because it shows that the company is serious, and acting in good faith. If they weren’t serious, they probably wouldn’t be willing to pay money up front. The only way for them to recoup their investment would be to actually produce your invention (which would begin generating royalties for you anyway). So the money they pay you is a strong motivation for them to get things moving forward, and usually demonstrates their intent to do so.


3. An anti-shelving clause: Putting such a clause in the agreement will give you the right to cancel the contract if the company doesn’t perform certain agreed upon actions. Sometimes a timetable is created for moving the invention into production. Other times this clause is structured as a “minimum royalties guarantee” – requiring the company to either pay you a minimum royalty in a certain time period, or default on the agreement.


Clearly, the most important thing you can do is to have licensing professionals on your side! Once again, always have the agreement reviewed by an attorney who specializes in license agreements. There are many more details that ought to be addressed in the licensing agreement that are beyond the scope of these article. A professional will make sure your best interests are considered.