Some businesses develop a proprietary product, but do not necessarily want to pursue manufacturing and distribution for that product. In that case, your company may wish to pursue a licensing opportunity for the product. In the licensing scenario, you or your company would grant a license to the licensee for a period of years with a royalty back to you or your company. Licensing royalties can be based upon gross or net revenues, an amount per unit, or other variations. When you license your intellectual property, you do not transfer your ownership rights, just the rights to commercially exploit the property.
Once you grant a license, you are giving up some degree of control over your property and how it will be brought to market. You should perform due diligence on the prospective licensee to determine their financial history and success in bringing products to market. Licensing can get your product to market quicker, but that must be balanced against your loss of quality control and dependence on the skills of third parties.
Licensing agreements can be drafted either broadly or narrowly, depending upon the desires of the parties and their relative bargaining strengths. For example, the license may cover a specific geographical territory or only apply to one of the several applications of the product. This cautionary approach is particularly applicable in the case of merchandise and character licensing, in which the license is granted to a manufacturer of consumer goods for using a recognized trademark or copyright, for example, in the merchandising of the Disney characters. Care must be taken in drafting license agreements that closely resemble franchises because you may be dealing with a hidden franchise that can lead to many legal headaches.
Technology licenses typically join the inventor/licensor with the company/licensee that has the financial resources and marketing clout to bring the product to market. A technology transfer agreement may transfer the
intellectual property rights with the understanding that the rights can come back or revert to the licensor if the licensee fails to meet its obligations and objectives set forth in the agreement.
License to Success: Licensing is ultimately a way to finance your product to market without having to raise your own capital. Many successful companies have used licensing as their entire revenue model, and have never manufactured or distributed products on their own.