Choosing Between Licensing and Manufacturing an Invention
Many inventors choose to license their inventions to a larger entity, while others choose to manufacture their inventions in their own business. Each of these options involves significant advantages and disadvantages, which you should evaluate carefully before deciding your course of action. Some inventions that are extremely complicated require substantial resources to manufacture and market them effectively. Inventors of these inventions may prefer to license or assign the invention, rather than assuming the costs of producing it. This allows them to focus on improving their inventions or creating new inventions. However, some inventors would prefer to build their own business and are ready to invest the necessary time and effort.
Advantages and Disadvantages of Licensing
A license allows another party to use your invention during a certain period of time. The inventor would receive royalties, which would be either a one-time payment or periodic payments, in exchange for the license. You will need to convince potential licensees that the invention is sufficiently developed to be marketable and that it would facilitate the operations of their business or otherwise generate profits for them. Inventors often struggle with this process. Only a very small percentage (perhaps 10 to 15 percent) are successful in licensing an invention.
Inventors often find a license attractive because they do not undertake any further risks in making, developing, or marketing the invention. The licensee also assumes any costs related to enforcing patent rights and preventing infringement. The inventor might do nothing other than collect royalties, while spending all of their time on further innovation. However, profits are lower for the inventor, since the licensee will want to receive most of the profits from the invention, based on the costs and risks that it is undertaking. Some inventors also are emotionally attached to their inventions and reluctant to yield control over them to others.
A variation on a license is an assignment, which permanently transfers an inventor’s rights in an invention to an assignee. This is essentially like a sale, while a license is like a rental. As with a license, an inventor might receive payment in a lump sum or in installments. Some types of licenses, known as unlimited exclusive licenses, produce the same result as an assignment because the licensee receives the sole right to manufacture and market the invention for an indefinite time. You can consult an attorney to review a proposed agreement if you are concerned about the difference between an assignment and a license.
Advantages and Disadvantages of Manufacturing
Since royalties tend to be quite limited, usually no more than 10 percent, some inventors will be tempted to take control of manufacturing and marketing an invention. They also may enjoy the process of running a business, and they may appreciate the ability to retain control over their creation. If the invention proves profitable, the inventor can make significantly more money. However, building your own business involves substantial risks. You will want to make sure that you have a solid base of financing and that you work with people whom you trust. Running a business is time-consuming and may not leave an inventor much time to create new inventions.
Perhaps surprisingly, inventors who take this step tend to have a high success rate. This may reflect the commitment of this relatively small group to growing a business and their awareness of the challenges that may arise.
If you decide to take the leap and start your own business, you may want to read more here about the business formation process.