The Invention Addict 12 Step Program to Invent—Going from Inspiration to Innovation.
This is a series of posts on the 12 steps how to invent a product. A DIY class for Inventors. 

The tenth step is NEGOTIATION– We are getting close. You did your homework and now you have the interest of a potential licensee. Don’t freak out.  Just the word can strike fear or cause your adrenalin to surge as you look forward to the dance. 

Yes, negotiation is a dance. You both want something, you don’t know each other too well, it can be awkward, but it can lead to mutually beneficial relationship. 

Who’s who? 

Your are the licensor, the company is the licensee. 

Common mistakes 

  • Rushing into a deal.
  • Getting greedy–Maintain perspective and look at the big picture. Run the numbers, a tiered royalty structure with guarantees may be better over the life of the contract. Each party can make money, don’t be a hog.
  • Getting stuck or getting fixated on a single item in the contract.
  • Getting emotional–The best deal I got on car was a car I did not want. It was a car for my wife.
  • Talking more than listening.
  • Thinking win-lose. It’s give and take. You need to make concessions for something that you want you need to give up something.
  • Not getting someone to review–someone who’s objective and preferable trained.
  • Letting two lawyers go at it–Try to contact the decision maker and not just let the lawyers duke it out on your nickel.

Typical Components of a Licensing Contract 

  • Royalty payments–the percentage of sales you will receive as a royalty. Royalties are based on gross sales–not on company profits. They are usually paid quarterly and can range from 1%-10%.
  • Territory–You want to try to get royalties for the countries where the company is selling into.
  • Advance payment–Upon execution of this Agreement, LICENSEE will make a non-refundable payment to LICENSOR of $_________, which shall be construed as an advance against future earned royalties.
  • Copyrights, Patents and Trademarks
  • Terms and Warrants
  • Product Designs
  • Default, Bankruptcy, Violation
  • Licensees Right to Terminate
  • Indemnification
  • No partnership
  • Governing law

Non-Negotiable Items-What to look out for 

  • Get the right to see the books
  • You are not responsible for legal bills
  • No end to payments-as long as the product is sold
  • Products that are derived from your product. This means if there are follow on products that build on your patent, you should be co-inventor of future patent filings.
  • Non-refundable advance-25% of first year’s royalties is not uncommon.
  • Make sure that there is a date specified for when the product is on the market, often referred to as “performance date certain”.
  • Don’t agree to pay product liability insurance.
  • Make no promise to sue, if there are infringements, it should not all be on you.

Techniques or Tactics 

  • The Advice technique is when the party makes proposal, you say, “You’ll have (need) to do better than that”.You are not demanding, you are advising them that they need to sharpen their pencil.
  • Don’t be the first to speak.  If you put a proposal or counter offer out there, let the other party speak first. There will be a real uncomfortable span of silence that will test your nerves. Say something to the effect “That’s not good enough” and shut up. A great salesman I worked with would say “the first one to speaks looses”, not exactly in line with win-win mindset.
  • Splitting the difference. This is where you encourage the other person to offer to split the difference. You say, “We’ve spent so much tin on this and we’ve come so far. We are only $XX,XXX a part. Let them make the offer to split the difference.
  • Flinching is when you balk at the first offer, even if it’s good. You want your reaction to be slightly negative, repeat the offer in a questioning tone. “Hmmmm, you are offering ABC?” See if they raise the bid
  • Nibbling is where you don’t ask for everything upfront. After you have an agreement in principle, add for more. The person feels good that they made a deal. Adding to the deal reinforces the feeling that they accomplished the deal. Buying car, about to sign, “It comes with a full tank of gas … right?”
  • Validate their objection, especially if they upfront say that something is a deal breaker. They might say. “There’s no way I can go over $XXXXXX.” Ask questions to understand why, it may not be a deal breaker after all.

Here are the 12 steps to invent a product:
1. Realization
2. Frustration
3. Ideation
4. Exploration
5. Investigation
6. Simulation
7. Productization
8. Confirmation
9. Communication
10. Conversation
11. Negotiation
12. Celebration

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