Invention Licensing Versus Manufacturing
Created by FindLaw's team of legal writers and editors | Last reviewed June 20, 2016
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In most situations, inventors can make money off of their inventions in two different ways: Either license the rights to make, use, and sell their inventions to other manufacturers or manufacture and sell their inventions themselves. There are vast differences between these two options, both in terms of how you will make your money, and in terms of the financing needed to get started. Whichever you choose will depend on your means, skill level, and what level of involvement you want with your invention.
FindLaw's Patents section contains additional articles and resources to help inventors protect and profit from their creations, including 10 Tips for Inventors.
Making Money on Your Invention: Two Choices
Choosing between licensing your invention to someone else and manufacturing and selling your invention on your own will depend much on your personality and what you like to do. Many inventors decide to license their inventions in order to make money because it does not require as much legwork or capital as does manufacturing an invention on one's own. If you find that you have a passion for the world of business, then you may want to consider manufacturing and marketing your own invention.
It is not always just the personality of the inventor that will make the decision between licensing and manufacturing your invention, though. Sometimes the complexity of the invention will force the inventor's hand.
In its simplest form, a license is an agreement between you (the "licensor") and another party (the "licensee") allowing the licensee to make, use, and/or sell your invention. In exchange, the licensee often agrees to give the license-holder a license fee as well as royalty payments for every unit sold that uses the invention.
The biggest advantage of licensing is the lack of risk. Under a licensing agreement, the licensee will have to take on all expenses relating to marketing and all risks associated with the product itself. All the inventor has to do is to wait by his mailbox for the checks to arrive. Perhaps the biggest risk that inventors face when licensing is getting a license at all. According to at least one study, only 13 percent of all inventors that attempted to license their inventions were successful.
If you do decide to license your invention, you should first find the people would want to see inventions like yours, such as a convention involving your target industry. If your invention is physical in nature, you should try to get enough funding to build at least one working model (or prototype). But make sure you protect your invention while shopping it around, perhaps with a non-disclosure agreement.
Keep in mind that you have the option of licensing your invention to more than one party, as long as you don't give exclusive rights to one party, which can increase your earning potential.
Assigning the Rights to Inventions
As an alternative to licensing your invention, you may decide to permanently assign the rights to your invention to another party in exchange for money. Unlike a license, an assignment is a permanent transfer of all rights you have to your invention. If you assign your invention, you become the "assignor," while the person buying your invention becomes the "assignee." You should think about assignment as analogous to selling your home -- once you have sold it, you no longer have rights to it.
There are some circumstances in which a license will look like an assignment. For example, sometimes inventors grant indefinite, exclusive licenses. Under such a license, the licensee gets sole rights to the invention for an indefinite period of time. Understandably, this looks much like an assignment of rights; but an attorney can help you sort it out. Remember that once you assign your rights to your invention, you cannot (in most circumstances) get them back.
For entrepreneurial inventors that have business skills in addition to their inventing skills, the risks and financial rewards associated with licensing their inventions don't make the cut. Instead, these inventors will take the time and effort to form a company and produce and market their own inventions. However, these inventors will require much more capital than will the inventors that seek only to license or assign their inventions.
At least one study has found that close to half of the inventors that choose to make and market their own inventions turn out to be successful. Before you decide to market your own invention, though, you need to be aware of just how much time and effort it will take for you to succeed. If you feel that you do not have this drive, you may want to consider licensing your invention.
Perhaps that biggest argument for making and marketing your own invention is the higher financial rewards that are possible. However, starting a company to make and market your invention can be incredibly risky.
Different Finances for Different Choices
When it comes to the financial backing needed for licensing your invention versus marketing and selling your invention, the difference is staggering. You will need far fewer finances to license your invention than if you chose to start your own business.
If you choose to license or assign the right to your invention, you will generally need financing to:
- Create a prototype of your invention, or create presentation materials if your invention cannot be prototyped;
- Market your invention to potential licensees;
- Create molds and acquire tools to mass-produce;
- Mass-produce your invention;
- Distribute your product;
- Collect money from your buyers; and
- Enforce your patent rights.
In addition to these expenses, you may also choose to form a corporation or take on business partners in order to get the production of your invention off the ground.
Before Making the Decision, Analyze Your Personality
Many inventors are tempted by the riches that they see just over the horizon if they can just make, market, and sell their own inventions. But you really need to be sure that you have a strong entrepreneurial drive. To help you figure out whether this path is right for you, take the time to answer these questions:
- Are you a great salesperson?
- Can you manage people well?
- Can you transfer your inventiveness to the business world?
- Are you willing to take risks?
If you feel that you can answer all of the questions in the affirmative, then maybe taking your invention to market by yourself could make you a lot more money that you could get through licensing.
Patent Troll: A Last Option
There has been an ever increasing trend for people with patents to not take either option. These people do not want to license their inventions, nor do they want to enter the market. In the legal world, these people are called "non-practicing inventors" or, pejoratively, "patent trolls." Much like the trolls that lurk under bridges in fairy tales, these patent holders wait for the right moment to jump out and assert their patent rights against those that they think have infringed.
These patent trolls sometimes make a lot of money in patent infringement lawsuits. However, the chances are very good that if you hold onto your patent without licensing it or entering the marketplace, the technology will pass you by well before you ever have the opportunity to bring a patent infringement lawsuit.
Need Help with Your Invention? Contact a Patent Law Attorney
Inventors have quite a few factors to consider when deciding how best to position their intellectual property, including available funds and entrepreneurial know-how. If you need help figuring out what to do, you may benefit from meeting with a patent law attorney.
You Don’t Have To Solve This on Your Own – Get a Lawyer’s Help
Meeting with a lawyer can help you understand your options and how to best protect your rights. Visit our attorney directory to find a lawyer near you who can help.
Contact a qualified business attorney to help you identify how to best protect your business' intellectual property.