Q & A Table of Contents
They Want To Buy Me Out
From: Sophia, Tel Aviv, Israel
Question: I am entering License Agreement negotiations regarding licensing my patented invention a very large manufacturer. The question is about the level of pre-marketing payment (up-front money) upon signing the agreement and then for the period until the manufacturing begins (minimal guaranteed royalties). Also the company requested the offer to purchase the patent at one payment. Thanks for your advice.
Response: It sounds as if the company with which you are negotiating is attempting to head in several directions at once. Please tell me if I have failed to understand the situation:
- If they succeed in confusing you sufficiently, perhaps they hope they can convince you to agree to a deal that is substantially more in their favor than yours.
- If the negotiation is for a license agreement, I would assume they are purchasing the rights to manufacture and market your invention for a specified period of time. During that time they would pay you royalties -- which is effectively a form of rental payment for the use of your property, the patented invention.
- The discussion about pre-manufacturing royalties sounds like a short-term 'rental agreement' at a lower rate until they can actually derive revenue from manufacture and sale of the product. This concept is not unreasonable; offering you money during the initial period could be favorable to you -- again, if it is enough.
- I get confused with the discussion of a proposal to purchase the patent with a single payment. That means the stream of income from the product goes to the manufacturer; they don't have to share future profits with you. If the paragraphs above describe the situation accurately, there are a number of issues for you to consider:
- How much did it cost you to develop the patent: time, testing, legal fees, the cost of those portions of your education that enabled you to develop the patent, etc.? Once you have calculated your costs, it should be reasonably simple to calculate the appropriate return your investment should yield. Then you can make a better decision about the choice between long-term royalties and a one-time sale of all your rights.
- Has the anticipated buyer given you an idea of their expectations of the income stream their royalties should yield to you over 1 year, 5 years, 10 years? You should calculate the net present value of the anticipated income; that should give you a sense of the appropriate price if you sell all the rights for a single payment.
- Do you have any other alternatives to this buyer? For example are there other manufacturers in Israel or other countries that might also be interested in buying your patent? Would any of them have the capacity to do as good a job of sales and manufacture of the product? How much might they pay you? How would they structure the business deal? If you have time, getting answers to this set of questions will give you not only a sense of the financial 'right answers' but also a sense of how badly the current buyer needs you.
There are other issues to think about: in selling/renting the rights to your patent, does that mean that you cannot invent something similar afterwards? Will the buyer be using your name on the product -- would this be good for your future career? and if it would be good for you, might that mean you are prepared to accept a lower price? Think about all the bargaining chips that can be considered, not just the money. It can yield a more creative and satisfying solution.
Good Luck,
Steve
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