Selling Out: How To License Your Big Idea

Don Lindemann thinks his makeover for the plastic drink bottle could be a hit at the retail counter. Since late 2004, the Minneapolis-based packaging consultant has spent about $9,000 patenting and prototyping 17 different ways his multi-chamber bottles could hold combination packages, like a granola bar and soda pop, or an aspirin and spring water. But at age 54, Lindemann is unwilling to stomach the cost and risk it would take to manufacture and sell the new bottles to companies like Pepsi-Cola. “If I was 20, I might try something like that,” he says. Instead, Lindemann hopes to license his idea to a bottle manufacturer with clients like Pepsi for recurring royalty payments. Lindemann figures his idea for improved grab-and-go convenience would be a financial win-win for the manufacturers, their clients, and himself. Licensing, or convincing someone else to buy your idea and pay you to use it, is big business. Royalty payments generated $115 billion for U.S. companies in 2002, according to the Internal Revenue Service. But before you picture yourself rolling in royalties, take this reality check to the bank. Invest In Your Idea Before you can license your idea, make sure it’s unique enough to patent, copyright, or trademark – a process that will require attorney fees. “I’ve been approached by people who think they have an idea, but don’t have a patent or a unique proposition,” says Leigh Ann Schwarzkopf, principal of LA & E Consulting, a Minneapolis licensing agency. “They don’t understand they need to invest in their idea first.” Your first step should be to answer this question: How will your invention make money for a licensee? That’s the number-one answer you need to sell your idea, Schwarzkopf says. Maybe it will reduce manufacturing costs, or sell more units, or win more customers. Whatever your value proposition, it must be demonstrable. “If your brand has a 10 percent royalty, you’d better be able to sell more than 10 percent more of it,” she says. “Otherwise it’s not worth it for the licensee.” (more)

Next, get to know your industry. Backing up your earnings estimates to potential licensees will require you to learn the industry inside and out – for example, who the top players are, what products cost, what prices they sell for, and how they are distributed. Doing this homework also will tell you what kind of deal to expect. If you license a new medical technology, you may stand to make millions. If you license a toy, however, don’t expect to get rich, says Andrew Berton, who in 1994 successfully licensed his board game “13 Dead End Drive” to a division of Rhode Island-based Hasbro. The game sold 3 million copies worldwide, but here’s how the math works: “The standard royalty rate is between 5 and 6 percent of the wholesale selling price, less sales tax and returns,” says Berton, who also pitches new toys to major manufacturers through his Minneapolis-based agency, Excel Development Group. “If a game is successful in a specialty market, (royalties) will meet your telephone bill for a year. If it sells well, maybe it’ll meet that bill for five years.” Learn to Negotiate It may take you many letters, phone calls, and in-person presentations to woo a potential licensee. But even then, negotiating a license won’t be easy. Lindemann says his most promising lead “has told me they’re only going to pay me if they have to,” or in other words, if they can’t design their own bottles without infringing on his pending patent. Even if all parties are initially satisfied with a license, things can go sour. For example, Lindemann says another inventor he met, who successfully licensed a carton perforation to Coca Cola, is now suing the company over a royalty dispute. Still, Lindemann isn’t giving up. “The idea of waking up one day and all of a sudden you’re a multi-millionaire is a wonderful dream,” he says. “But it’s just as neat to me to come up with an idea that people will use.”