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An excerpt from “From Idea to Success” by Gregg Fairbrothers and Tessa Winters comes the advantages and disadvantages of licensing your intellectual property (IP).

To maintain more control over future development and the potential financial rewards, some inventors keep their patent rights and build up a company to bring their technology to market themselves. In many cases, though not all, both licensing and building a company are possible. Thus, the first fork in the road that you probably will encounter in thinking about developing an idea is whether you will do it yourself by starting your own enterprise or license it to someone else. There are pros and cons to each approach.

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Advantage of Licensing

  • If the IP is developed and marketed successfully, the licensors receive a revenue share.
  • Licensee does all the work, bears the costs, and takes all the risk.
  • Licensee generally has the in-house resources and expertise to develop, manufacture, and sell the product.
  • Licensor’s IP may be only a component of a final product, and so there is no realistic alternative to doing it alone. Licensor is dependent on licensee to integrate the IP into a product, make it, and sell it.
  • Licensors can focus on what they do best in their job, in their lab, or at home.

Disadvantages of Licensing

  • Licensor loses control over prosecution and development of the IP.
  • Revenue share is small. Royalties vary depending on sector and product but generally run 2 to 6 percent. Sometimes licenses grant equity in the licensee, especially when it is a small company or the IP is foundational. Equity can be a much better deal; the licensor benefits from the company’s total future value growth, not just revenue related to its own IP.
  • Licensing carries the risk of nondevelopment or being “prioritized out.” Not infrequently, companies license a patent to get it off the street so that it doesn’t compete with their own established products. Further, in bigger companies especially, internal competition for investment dollars and priority often means that ideas “not invented here” get shelved.

Taken with permission from McGraw Hill.

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