Guest Post by Jim DeBetta- President, Academy for Entrepreneurs

Licensing is the most popular method used to commercialize and profit from patents, yet few inventors are aware of the realities of licensing. In fact, I find there are many misconceptions about licensing.  Since I talk to inventors and companies about licensing patents and products every day, I thought I would clear up some questions and point out some misconceptions and try to give you a realistic perspective on licensing.
 
Most books about licensing are written by attorneys.  While attorneys are knowledgeable concerning the legal matters of licenses, I have found most to be unfamiliar with the realities of the marketplace, especially as it relates to consumer products, which is the category most inventors patent in.
 
You can find generic license agreements in books and on the Internet these days.  Again, while these agreements cover the basic legalities of a license agreement, they don’t cover, in my opinion, all the terms needed to memorialize the relationship between the licensor (you) and the licensee (the company licensing your product).  I often use the term patent and product interchangeably, so you can take them to be the same thing.
 
The Terms That Drive Value
 
I will briefly discuss what I feel are the terms of a license that drive value.  Although this isn’t a comprehensive list of the terms required in a license agreement, they are the terms that drive the value of a license.  Disclaimer: I am not an attorney.  I am however a successful licensing executive and I have negotiated hundreds of licenses.

1. Licensing—It’s all about exclusion
The license grant determines what rights you grant to the licensee.  You should only grant a licensee the rights they can execute on.  There are several types of licenses, but I will focus on three here: exclusive licenses, non-exclusive licenses, and limited exclusive licenses.
 
Most inventors understand what an exclusive license is.  You are licensing all the patent rights to one company.  An exclusive license even prevents the inventor from using the rights.  Most companies will want and try to get an exclusive license on your patent.  They want to lock it up.  While this may make sense in some cases, you want to be certain the licensee can execute on all of the rights you are granting.
 
A non-exclusive license gives a licensee the rights to your patent but allows you to license the patent to other companies on a non-exclusive basis.  It also allows you to use the patent rights.
 
A limited exclusive license grants exclusive rights to a company with certain restrictions or limitations.  An exclusive license can be limited in various ways.  Some common limitations are: field of use, territory, time and patent components.  A limited exclusive license is the type of license I most commonly recommend.  Let’s discuss some of the common limitations on an exclusive license.
 
The field of use describes in what field a patent can be used.  For example, let’s say you have a patent on a laser technology.  Lasers are used in many fields.  They are used in consumer products, medical products, and commercial products just to name a few.  So you can license your patent exclusively to one company in each field of use.  That is three license agreements.
 
Territory describes the geographic territory in which a license is granted.  Let’s say you have obtained a patent in the US, Europe, Japan and China on a laser technology.  You can now license your product exclusively to a different company, in each field of use within each territory.  Now you have 12 license agreements (assuming a licensee doesn’t obtain a license in multiple territories).
 
You can also limit a license using time.  This is often called the term of a license.  You might grant a company an exclusive license for five years because the product requires a large upfront expense to get to market.  After five years, the exclusive expires and you can license the patent to other companies while allowing the original licensee also to maintain a non-exclusive license.

A patent actually grants the holder the right to exclude others from making, using, offering for sale, selling and importing the invention.  Some licenses (usually only exclusive licenses) may also include the right to sublicense the right granted.  You can limit a license using the components as well.  For example, if a technology requires a significant amount of research and development and investment in production facilities to commercialize, no company is going to invest the time and money to commercialize the technology unless they feel they can make their money back plus a profit.  So you might grant the exclusive right to make the product to one company who agrees to commercialize the technology.  Then you might grant several companies the right to import and sell the product in various territories.  This scenario works well because the manufacturer has the incentive to invest in bringing the technology to market and also has established companies ready to sell the product.

2. Royalty—Sometimes Lower is Higher
One of the most important aspects of a license is the royalty rate.  This is the percentage that the licensee agrees to pay you for the rights to the patent and product.  Inventors naturally want to negotiate the highest possible royalty.  But a high royalty isn’t always to the inventor’s benefit.
 
When negotiating a royalty rate there are several factors to consider.  The first is the manufacturer’s suggested retail price.  This is what the finished product will sell for to the end user.  Ask the licensee what price points they want to hit at the retail level.  They should be open with this information.
 
From the manufacturer’s suggested retail price, you can determine the approximate wholesale price by knowing what channels the product will be distributed in.  For example, a product sold through mass retail channels will typically have a wholesale price of 35% to 65% of the retail price.  That is the retailer’s discounted price.  Again, ask the licensee what channels they plan to distribute through and what the typical discounts are in those channels.  Also, some manufacturers use distributors which require a piece of the pie.
 
Let’s look at an example I recently encountered.  A product, let’s call it “Hitchy,” was going to be sold in the automotive aftermarket channel.  In this case the manufacturer sold through a distributor to automotive retail chains, so the channel included a 35/35 mark up structure.  The target retail price was $19.99.  So the retailer would buy the product from the distributor at $13 and the manufacturer would sell to the distributor at $8.45.
 
Let’s look at two scenarios which illustrate why the royalty rate is important, but should be examined in terms of volume.  Assume the manufacturer’s cost of goods is $5.00.  That means the manufacturer’s gross profit is $3.45, before the royalty.  Let’s say in the example above, you drive a hard bargain with the manufacturer and demand a 10% royalty.  That means the royalty is 10% x $8.45 or $0.845 per unit.  And let’s assume the manufacturer’s minimum required net margin is 35%.  This deal won’t work!  The manufacturer’s net margin is only $2.60 ($8.45-$0.845-$5.00) or 30% ($2.80/$8.45).
 
Even if the manufacturer decides to go forward with the product they will have to raise the price to meet their minimum net margin, which will put the product over the magic price of $19.99.  What will happen?  The manufacturer will sell fewer units per year.  Why?  If you raise the price of any product, fewer consumers will by the product.  This effect, often called price elasticity by economists, has been proven again and again.  So perhaps the manufacturer only sells 100,000 units per year at the higher price.  So your total payoff is 100,000 units x $0.845 per unit = $84,500 per year.
But what if you had been more flexible with the royalty rate?  Let’s say you were willing to lower your royalty rate to 6% to allow the manufacturer to meet its minimum allowable margin while keeping the retail price at $19.99.  Your royalty now is $0.507 per unit.  And the manufacturer’s net margin is 35%.  Let’s now assume that the lower price results in an increase in unit sales to 175,000 units per year.  Now your total payoff is 175,000 units x $0.507 per unit = $88,725 per year.  Your royalty rate went down 40%, but your total payoff went up 5%!

3. Performance—Make Sure they Practice what they Preach
Performance requirements need to be in every license agreement.  These include, but aren’t limited to, an introduction date, minimum royalty payments and an anti-shelving clause.
 
The introduction date is the date by which the licensee will have your product manufactured and ready for sell.  The introduction date will vary depending on the complexity of the product.  Remember, nothing ever goes as planned.  Make sure you have a reasonable cure period for the introduction date.  Usually 30-90 days depending on the complexity of the product.
 
Minimum royalties also need to be included in a license.  The exception is a non-exclusive license.  If a company can’t meet minimum annual sales targets, you might want to terminate the license, or convert it to a non-exclusive license.  Also, you always want to make sure your licensee is continuously marketing and selling your product.  Unless the product is seasonal, the licensee should be able to meet some portion of the minimum annual royalties in each quarter.  For example, let’s say a licensee has an exclusive license with a minimum annual royalty target of $100,000 and they only sell enough units to pay $90,000.  You would expect the licensee to pay an extra $10,000 to maintain the exclusive (the licensee might want to credit this against future royalties).  If they refuse to pay the extra $10,000 you could terminate the license or make it non-exclusive.  However, you want to be careful before terminating a license because it means you have to start all over again with another licensee (assuming the license is exclusive), if you can find one.  Certainly if the licensee only sold enough units to pay $40,000 in royalties you would want to at least make the license non-exclusive and perhaps pull it entirely.  Also be conscious of what is going on in the market in general.  If macroeconomic conditions are hurting all products in the category, it probably isn’t the fault of the licensee that sales are slow.  Minimum royalties are the toughest terms to negotiate.  You want to be fair and reasonable.  A tactic I often use is to ask the licensee how many units they would need to sell each year to keep the product in the product line.  Companies drop products all the time because they don’t meet internal minimums.  Your product should be no different.
 
Myths and Misconceptions
 
Now that we have covered the basic terms of a license, let’s look at some common myths and misconceptions of licensing.

Highway Robbery!
Many inventors are skeptical about licensing because they feel the licensee is somehow out to get them.  I have never encountered this situation.  Many inventors feel if they are getting a 5% royalty then someone else, usually the licensee, is making 95%.  Highway robbery these inventors shout!  But if you look the Hitchy example above, the licensee has other mouths to feed, including their own.  The licensee had a net margin of 35%.  The royalty was $0.507 which is 17% of the licensee’s margin.  That’s a great deal considering the licensee had to pay to tool, manufacture and package the product to get it up and running.  Your licensee should be your partner, not your adversary.  If a potential licensee isn’t offering you a fair royalty, and you can show them on paper, let them know your concern and if they don’t come around, walk away.

Giving Away the House
Some inventors feel if they license their product they are giving it away.  First of all, when you license a patent, you still own the patent.  If you own a house and rent the house you still own the house.  If the tenants don’t pay rent on time or if they wreck the place, you can kick them out and rent it to someone else.  This works the same for a license.  If the licensee doesn’t pay royalties or doesn’t do what they agree to do in the license agreement, you can terminate the license and license to another company.  And if you are careful about licensing the proper rights, you can usually seek multiple licenses.

The Grass is Always Greener
When dealing with a potential licensee, some inventors develop the attitude that they can get a better deal from someone else.  They think, “If this company wants my product, others must.”  While that might be the case, you had better be sure you have another deal on the table before you walk away from a fair deal.  When you are attempting to license your product, you should be talking to all the qualified companies that could license your patent at the same time.  Or you can divide your prospective companies into tier 1 and tier 2 companies and go after tier 1 first and then drop down to tier 2 if you are not getting a good response from the tier 1 companies.  It can take four to six months for a company to evaluate a license offer.  So you don’t want to go down that path with one company and if you don’t like their offer have to start all over with the next company.  If the other company comes back and isn’t interested in licensing or gives you a lower offer it may be too late to do the deal with the first company.  They may have already committed the budget for your product to another project.

I Can Make More Money on My Own
Another common reaction I get from inventors once a company comes to the table to license their patent is I can make more on doing it myself.  This is especially true when an inventor looks at the royalty versus the wholesale price and retail price.  Sadly they don’t understand what “it” requires.  In the Hitchy example above, without knowing the mark up in the channel the licensee was selling to, some inventors might wrongly think the licensee was selling the product for say $13 to the retailer.  Then they would ask, Why should I get $.50 when the licensee is getting almost $8 per unit?  That is why it is important to know how each channel of distribution works.  In fact, the licensee was netting $2.60, and while this is more than what the inventor was making ($0.507), you have to consider the risk the licensee took to tool, manufacture and package the product.  In risk-adjusted terms the royalty is fair.  But some inventors think, I’ll just make it myself.  This leads to my next misconception.
 
All I Need is A Manufacturer
Manufacturing a product in any reasonable volume is risky.  It means investing money in set up, tooling and inventory—often before you have sold a single unit.  Depending on the product, this figure could range from $5,000 for a short-run, single cavity mold, to $100,000 for a multi-cavity mold.  Next, the manufacturer will quote you a unit cost for the product at various quantities.  So before you have sold a single unit, you are looking at a significant investment.  On top of the tooling and manufacturing cost, you must also look at packaging, marketing, sales, freight and storage costs.  And don’t forget about product liability insurance.
 
My Product is a No-Brainer
Most inventors feel like their product is so good that all they need to do is send a letter to a company and the money will come pouring in.  Take a second to think about your day.  What if you had to do all the work expected of you this week AND consider 20 to 50 new business opportunities?  Could you do it effectively?  I doubt it.  As Herbert Simon said, “A wealth of information creates a poverty of attention.”  So, sometimes the easiest thing to do is to maintain the status quo.  Companies are constantly looking for ways to improve and differentiate their product lines.  Ironically, such a focus on their products can lead to myopia.  As a result, good ideas often originate from outside a company or industry.  You would think these ideas would be easy to introduce to companies.  In reality, convincing companies who rightly feel they are experts in their product line and industry to pay for your idea is difficult.  Most companies have people that do nothing but focus on new products and ideas and they often suffer from a syndrome called Not Invented Here.

All I Need is My Patent
To license a product or patent, you need to know how to qualify companies AND know how to give the decision-makers at these companies all the information they need to make a well-informed decision.  At a minimum, this will include a proof-of-concept prototype, renderings of a finished product and a positioning of the product with the prospective company you are targeting.  You have to show a company how your product fits their product lines, distribution channels or customer base.  And you have to show them how your product will be profitable.  The more innovative the product or concept, the more difficult it is to convince a company to go for it.  When dealing with far reaching innovations, try to also focus on the steps in between and show the company how they can ease their customers into the long-term objective.
 
Licensing for Long Term Success
Licensing is and always will be an effective method for profiting from patents.  Understanding the realities and value drivers of a license will help you be successful in your licensing efforts.  When exploring a license with a company, I recommend using a simple term sheet to nail down the basic terms of the license.  Do this in English.  Then let the attorneys put it in legal format.  Agreements serve to memorialize what the parties agree to on a certain date in time.  But we live in a constantly changing world, so agreements often need to be updated.  Make sure you leave the door open to future evaluations.
Happy licensing!

By John McKee, Founder and President of BusinessSuccessCoach.net

Expert’s Top 7 Tips for Leveraging Business Negotiation Skills as a Life Skill

Everything is fair game; whether you covet a new job, a raise, a business deal, a new car, some new bling, or need to rectify a problem with a loved one, the “art of negotiation” is your secret weapon to achieving the result you want. Indeed, among the greatest strengths of very successful business people is their ability to out negotiate with others to achieve their desired result.

Negotiating need not be back and forth, point-counterpoint banter. Rather, the most proficient negotiators manage these conversations in such a way that the other party likely does not even know they are engaged in a bargaining process. The bottom line is simple: if there is something you want that is in someone else’s control, knowing how to negotiate will stack the odds in your favor.

With this in mind, here are my top 7 tips on turning business negotiation skills into a life skill:

1. First and foremost, be prepared to walk away. This is single most important strategy to getting what you want out of life. If you aren’t prepared to say, “No” and mean it; then you are likely to end up settling for a lesser outcome. Before entering into the negotiation, know in advance exactly what you are and are not willing to concede, so that you do not need to process this information on-the-fly without adequate time to weigh the pros and cons of each.

2. Know when to forego all together. A good deal comes together quickly – a bad deal takes way too long. Take a clue from the amount of time it’s taking to get what you want and, if exceedingly long, don’t waste valuable time and effort with the misguided notion that “just one more” give or take will make the deal work. If you have to “force it,” chances are it will come back to bite you later on.

3. Deal at the right level. Nothing is more frustrating than trying to do a deal with an individual who can’t make the final decision. It’s like negotiating against yourself – you address an issue and try to come to a conclusion and then the other person takes that to someone else “behind the scenes” only to come back and say it can’t be done on those terms. It’s far more efficient and effective to find the right person to negotiate with directly, “(wo)mano y (wo)mano.” If you don’t know or if it’s not obvious if you’re dealing with the right person, directly ask up front if they have authority to make a final decision on the matter.

4. Due diligence to come prepared. The more information you have surrounding the circumstances of your endeavor, the “marketplace,” for example, the more likely you are to not only prevail, but also get the best deal possible. While you may actually prevail by shooting in the dark, not knowing the extent of the opportunity could result in your leaving a lot on the table. Whether it’s the average pay for a given job, the price typically paid for a product or a service, or who you are in competition with for a new position – knowledge is truly power.

5. Don’t take anything personally. To maintain objectivity, treat every negotiation as if you are doing a deal for someone else who has hired you as the professional “closer.” When you allow yourself to get emotionally involved, rational thought often goes by the wayside and you’re far more likely to concede to your later regret. Cool heads get the best, and most, out of what they are seeking.

6. Anticipate objections. Prior to the negotiation, brainstorm all the reasons or objections that may prevent you from getting what you want – and prepare a thoughtful counterpoint for each, one at a time. During a negotiation, people conjure all sorts of reasons why something can’t be done, many of which are often bogus. Until you know the valid sticking point, you are just spinning your wheels.

7. Don’t underestimate Karma. What goes around indeed comes around. The best deal is one where both parties walk away feeling positive about the result of the negotiation. The worst deal is that where one side leaves the table feeling slighted with the short end of the stick. If you’re the kind of person who “has” to win and is prepared to humiliate or otherwise make someone feel bad as a result, sooner or later the gain is likely to come back to haunt you. Accordingly, consider in advance what would satisfy the opposition and be prepared to pull those “cards out of your pocket” strategically during the course of discussion.

About the Author

In my 30-years as a corporate executive and as a business success coach for others , I have learned what works and what does not work in striving toward a desired outcome both in the workplace and in one’s personal life. Interestingly, the process is very much the same in both environments. The key is to be tough but fair in such dealings, come prepared, and know when to walk away.
John McKee, Founder and President of BusinessSuccessCoach.net, is the author of “Career Wisdom” and “21 Ways Women in Management Shoot Themselves in the Foot.” He can be reached at 720-226-9072, john@businesssuccesscoach.net, or through his web sites at www.BusinessSuccessCoach.net and www.BusinessWomanWeb.com.

Guest post by Todd Brabender is the President of Spread The News Public Relations, Inc.

Mastering the Media: How to make the most of your publicity/media exposure opportunities

As a former TV news reporter/producer and a current PR professional, I have been on both sides of the media interview game. I like to think I have a good eye for what makes a good interview source, how to conduct an interesting interview, and how to give a compelling interview. There are a few tricks of the trade that can make you come off like a pro — which will make the reporter’s job easier and most likely translate into a better PR placement for you.

Here are a few basic tips to follow:

* When a publicity campaign generates a media response, respond as promptly as possible. The media is on constant deadline. If they don’t get what they want from you quickly — they WON’T wait — they WILL move on to another source.

* State facts, not fireworks, keeping superlatives to a minimum. Proving your product is indeed the “BEST” is impossible. So don’t. Simply state the specific benefits of your product matter of factly. As long as you have a quality product, something that should be evident by the time you implement a publicity campaign, your product won’t need “BEST EVER” or “NUMBER 1” claims to come out in a positive light.

* Speak in sentences, not phrases. Articulate your answers in the following manner: Subject — Verb — Object — Reason

Ex: “We (subject) are launching (verb) our new product (object) to give consumers a healthy new option in beverages (reason).”

This will help you give answers that are straightforward and easily understood. Beginning sentences with phrases, tends to make your answers seem drawn out, disjointed and most times unresponsive. This is not to say you should never begin a sentence with a phrase. Granted, some media savvy interviewees can pull it off with articulation. But until you get to that level — stick to the fundamentals.

* “Echo-answer” the main questions. If a reporter asks: “What’s so great about your new product?” — try to paraphrase and answer: “The great thing about our product is…” That quote/soundbite is much more likely to be used because that answer can stand on its own without needing a “set-up” sentence in the article/story. A reporter can throw that quote in anywhere and it is a logical, understandable statement about the product.

* Keep quotes and sound bites concise and articulate. If you must have a “canned response” to a question speak conversationally, not like a robot. A good rule of thumb for answer lengths: Effective TV/radio news broadcast soundbites should be around 4-10 seconds — something you can speak comfortably in about 3 or 4 normal breaths. Anything longer and it may seem to drone on. That’s why they are called sound bites. Regardless, stick to the S-V-O formula and there’s no real way you can get off track and therefore open you up to awkward follow-up questions.

* Be a well, not a fountain. By that I mean allow the interviewer to dip in and draw out your responses instead of spewing forth a tirade of unsolicited information. (Don’t worry – most interviewers will “lead” you into discussing the most relevant aspects of your product) You will seem more genuine and less self-serving if you answer the interviewer’s questions succinctly and professionally. This is especially true in “firefighting” publicity — when your product/business/company is being interviewed in the wake of a problem.

* Speak to the interviewer, not the medium. Don’t get blinded by the “stage lights”. Whether you are speaking to the editor of a small town weekly newspaper or Oprah, consider the reporter just a single person in your extensive targeted audience. Treat the interview as a one on one conversation with the reporter. That will make you more at ease, allow you to think more clearly and let you be more genuine in your responses.

About the Author

Todd Brabender is the President of Spread The News Public Relations, Inc.
His business specializes in generating publicity & media exposure for innovative
products, services & experts.
(785) 842-8909
todd@spreadthenewspr.com
http://www.spreadthenewspr.com

Guest Post by Brett Stevens, SearchLogix Group

Are you your resume? I don’t think so.

A resume is a brief snapshot of our work history. If the candidate lacks a certain requirement, the recruiter should ask if the candidate has experience in that area. It might have just been left out intentionally. For example, “The candidate has never worked in a Distribution Center” might be that the candidate never specified the difference in a distribution center or a warehouse and didn’t include it in the resume. “The candidate has never implemented a Warehouse Management System before!” The candidate elected not to put that on the resume. We are taught to “be direct and get to the point” and a resume should be a light overview of the work history and basic contact information.

Does a piece of paper accurately predict what results a new employee? Not without personal contact to “peel the onion open” to see what’s driving the candidate, how results are created, what the motivation is, etc. The better recruiters will explore the best fit that is essential to placing the top candidate for your company in a critical position. If your recruiter is “worth his or her salt” they will explore the candidate’s background in detail and identify the requirements needed to fill the position. Recruiters don’t want to waste time with the wrong candidate.

Start a search with clearly defined requirements and then pass them along to the recruiter. We hear clients ask for overseas negotiation experience, but then state later we want someone who has actually flown overseas and knows the proper vendors to deal with in the Orient. A far cry from “overseas negotiations.” Identify those requirements and work accordingly. Recruiters want to get the right candidate and make the placement. More then likely if they have spent time with the candidate and submitted them, it’s because the candidate matched the given requirements.

About the Author:

Brett Stevens is founder and President of The SearchLogix Group. Brett has enjoyed remarkable success in the executive search business in the fields of Software Sales, Logistics, Supply Chain Management, Distribution, Warehousing, and Transportation. He has achieved the industry’s highest level of professional certification: Certified Senior Account Manager (CSAM). He has received numerous regional, national, and international awards through meeting the needs of his clients. He continues to achieve record breaking performance and has been nationally recognized for those results with The SearchLogix Group. Brett is a member of The Council of Supply Chain Management Professionals, formerly The Council of Logistics Management (CLM), The Association for Operations Management, The Warehousing Education and Research Council, and The Institute of Industrial Engineers. He has been recognized in many trade and online magazines and is a notable guest speaker. Most recently, Brett was recognized internationally by both the American Stroke Association and the Prostate Cancer Foundation for his fundraising efforts. You can email Brett at brett.stevenspr@searchlogixgroup.com or telephone him at  770-517-2660  x20.

Article courtesy of the Recruiting Blogswap, a content exchange service sponsored by CollegeRecruiter.com, a leading site for college students looking for internships and recent graduates searching for entry level jobs and other career opportunities.