If the following conditions apply to you:
- You have decided for a variety of reasons that you shouldn't be the one to manufacture, market, and distribute your invention yourself, you invented a better mousetrap but you don't want to go into the mousetrap business.
- You were/are not an employee and your invention was/is not automatically assigned to your employer as specified in your contract.
The Licensing RouteLicensing involves a legal written contract where you the owner of the patent are the licensor, who grants rights to your patent to a licensee, the person that wants to license your patent. Those rights can include: the right to use your invention, or copy and sell your invention. When licensing you can also write "performance obligations" into the contract, for example, you don't want your invention to just sit on the shelf so you can include a clause that your invention must be brought to market within a certain amount of time. Licensing can be an exclusive or non-exclusive contract. You can determine how long the licensing contract will be in effect. Licensing is revocable by a breech of contract, by preset time limits, or by a failure to meet performance obligations.
The Assignment RouteAssignment is the irrevocable and permanent sale and transfer of ownership of a patent by the assignor (that's you) to the assignee. Assignment means that you will no longer ever have any rights to your patent. Typically its a one-time lump sum total sale of your patent.
How The Money Rolls In - Royalties, Lump SumWith licensing your contract can stipulate a one-time payment or/and that you receive royalties from the licensee. These royalties usually last up until your patent expires, that could be twenty years that you receive a small percentage of the profits from each product that is sold. The average royalty is about 3% of the wholesale price of the product, and that percentage can commonly range from 2% to 10%, and in very rare cases up to 25%. It really depends on what kind of invention you have made, for example; a brilliant piece of software for an application with a foreseeable market can easily command double digit royalties. On the other hand, the inventor of the flip-top drink can is one of the richest inventors in the world, whose royalty rate was only a tiny percentage.
With assignments you can also receive royalties, however, lump sum payments are much more common (and bigger) with assignments. It should be pointed out that because licensing is revocable, when someone doesn't pay you your royalties that's a breech of contract, and you can cancel the contract and take away their rights to use your invention. You would not have the same weight with assignments because they are irrevocable. So in most cases it is better to go the licensing route when royalties are involved.
So which is better royalties or a lump sum? Well consider the following: how novel is your invention, how much competition does your invention have and how likely is it that a similar product will hit the market? Could there be a technical or regulatory failure? How successful is the licensee? If there are no sales, ten percent of nothing is nothing.
All the risks (and benefits) involved with royalties are avoided with a lump sum payment, and with assignments, that lump sum payment you receive, you never have to refund. However, negotiations for a lump sum payment do acknowledge the fact that the buyer is paying more upfront because they are assuming more risks to gain themselves a greater profit in the long run.
Deciding Between Assignment or LicensingRoyalties should be the main consideration when deciding between licensing or assignment. If you choose to receive royalties, choose licensing. If you want the capitol that the best lump sum payment will bring you choose assignment. Are you in debt from your invention project? Would the money advance other projects and erase your debts?
Or is your invention ready for commercialization, ready to make and sell, and you have determined that sales would be good, and that you want royalties, then licensing is probably the better choice for you.