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Licensing May be the Best Business Model for You

Intellectual Property Licensing Business ModelLet’s face it, not every inventor, scientist, or engineer is cut out to be a great businessperson.

If that sounds like you, then you may be better off employing a licensing model rather than a traditional business model for commercializing your intellectual property. Licensing puts the burden of commercializing your IP on somebody else’s shoulders.

You will recall that earlier this week, in The Operating Model Just Might be Best for You, we explained the advantages of the traditional (often referred to as ‘operating’) model and promised to follow up with this article highlighting the advantages of the licensing model. But, before we go any further, we want to remind you of something important from the first post in this series, Your IP Gives You Two Business Model Choices. In order for the licensing model to work:

  • A technology or other intellectual property must be protected through a patent, copyright, trademark, or trade secret in order to prevent other people from using it.
  • One party has something of value, i.e. intellectual property. Another party needs access to this “something” because it provides the best possible solution to a specific problem.

Now that we’ve refreshed your memory about the necessary prerequisites of the licensing model, let’s recap how it actually works.

In the licensing model, an inventor develops an innovation and then protects that innovation through a patent, copyright, trademark, or trade secret, and thus creates intellectual property. The inventor – the owner of the intellectual property – then licenses the innovation or technology to a second party whose responsibility it is to commercialize the innovation. As compensation for allowing another party to use its intellectual property, the licensor will receive a royalty.

The vehicle through which the right to use the IP is transferred from the owner to the user/licensee is called a licensing agreement, and it is the basis for the licensing business model.

Advantages of a Licensing Model

Many inventors will choose to license their technologies because of the following advantages inherent to the licensing model:

  • The licensor (inventor-owner) does not have to finance the commercialization process.
  • The inventor can focus all of his energies on the next innovation.
  • The licensor avoids the need to create and operate a company.
  • The innovation will most likely get to market faster because a larger, more experienced company is handling the commercialization.
  • The innovation may reach more markets if the licensee is a large, well-funded enterprise.
  • The licensor will not have to build and manage a commercialization team.
  • The licensor will not have execution risk.
  • The licensor should be protected from product liability issues if the licensing agreement is properly written.
  • The licensor retains ownership of the intellectual property.

How Do I Evaluate Potential Licensees?

So, you’re thinking that the licensing model sounds pretty good, right? Develop and protect your intellectual property, let someone else worry about taking it to market, and watch the royalties roll in.

In reality, it’s not quite that easy.

We vastly simplified this process in order to provide a broad overview of how licensing works. In practice, a lot of thought must go into evaluating potential licensees and structuring your licensing agreement.

Here are some criteria to consider when selecting a licensee and drafting a licensing agreement:

  • Will you offer an exclusive license or a non-exclusive license?
  • Are you or your licensee responsible for defending your patent? With the high cost of litigation, it is a huge plus to shift this responsibility to your licensee should your patent be challenged or infringed.
  • How will royalty payments be determined?
  • What conditions constitute grounds for early termination of the licensing agreement?
  • Will you allow for renegotiating the agreement after a period of time has passed?
  • Does the agreement guarantee a minimum or maximum royalty per contract period? Does the agreement have provisions for assessing penalties for late royalty payments?
  • What happens if the licensee goes bankrupt or is acquired? Better get that into the contract as well.

When evaluating a potential licensee, you should focus on its ability to effectively commercialize your IP. Sometimes that means considering companies that have a proven track record of marketing and selling products based on IP similar to yours. Depending on the IP, the best way to commercialize it could also be to license it to a startup, a manufacturer, or a bunch of companies in separate territories.

In conclusion, if you are first and foremost an inventor or developer, and do not care to operate a commercial enterprise that will require capital, risk, and management, then a licensing model might be the choice for you.

For another take on how a licensing model might work, stop by this 2012 blog post.

So, which is it, operating or licensing? Only you can decide because you know your strengths, weaknesses, skills, and talents better than anyone else.

This article is for general informational purposes only and does not constitute legal advice. You should consult a qualified attorney before making important decisions concerning intellectual property.

Jimmy's background includes over 40 years in international, commercial, and investment banking, and nearly a decade as the principal shareholder and CEO of a rapidly growing manufacturing and distribution business in California. Today, Jimmy spends his time advising and consulting with entrepreneurs on matters related to business planning, as well as capital markets and funding strategies. Jimmy works with clients throughout the world in industries that include financial services, real estate, manufacturing and hospitality. View details.

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