Okay, you've got a great idea for a patent! Now, how will you make money from it?

Most inventors follow a typical pattern: They perfect their invention, determine its marketability, and take steps to protect it under patent laws. But then comes a difficult decision. How will the inventor make money from it? Should the inventor license the invention to a third party, or should the inventor manufacture and market the invention? This decision will affect not only how you earn money, but also how much financing you need to proceed.

If you are a typical inventor, you will probably want to license your invention and collect royalties, or even sell it outright -- we’ll call this typical person the “inventor-for-royalties.” But if you are more motivated and have a competitive business streak -- we’ll call this type of person the “entrepreneurial inventor” -- you may wish to start a small business to produce your invention and market it. In that case, you will need substantially more financing to develop, produce, and distribute your product.

To some extent, your decision is influenced by your invention. Certain innovations, because of their complexity, scope, or exorbitant cost of production, may lend themselves to licensing. Often, however, the decision should be based more on you than on your invention. You must objectively examine your inventing personality.

The Inventor-for-Royalties

Licensing or assigning rights to your invention for cash is a simpler, less-expensive route than manufacturing and selling your invention. Licensing or assigning your invention is often preferable for those inventors who want to make money but care primarily about innovating and spending time in their lab.

Licensing

A license is simply an agreement in which you let someone else commercially use or develop your invention for a period of time. In return, you receive money -- either a one-time payment or continuing payments called royalties. As owner of the invention, you will be the “licensor,” and the party receiving the license for your invention is called the “licensee.” What makes a license appealing is that the licensee assumes all of the business risks, from manufacturing to marketing to stopping those who infringe on the product’s patents. The inventor/licensor sits by the mailbox and waits for the quarterly royalty checks.