A patent is a grant to the exclusive use of an invention to the inventors or whomever the patent gets assigned to, such as a company. It holds the right to exclude others from using, creating, selling or importing the invention.
An inventor can patent a machine, a part, a process, a combination of different matter, or any new improvement on an existing idea. Patents are a great way to protect your idea, but do not in any way guarantee it will make you rich. The idea needs to be used in order for that to happen, otherwise it is just an expensive piece of paper. Patents usually cost between $2,000-$10,000 to obtain due to legal fees and attorney fees. The variation on cost is due to the simplicity or complexity of the patent, how many other patents it references, and what category the patent falls under. You can draft up the application yourself but it may not hold up in court so well later.
What can you do with patents?
98% of patents filed for never make money. Why? The issuers are just trying to protect their ideas and the ideas never make it mainstream and they are not familiar with how to make money with them. How can you have better odds? First, you can talk with companies about your idea to get a feel for what others think before you have a patent by having them sign a NDA (non-disclosure agreement) before speaking with them. Another way to cut the costs up-front is to file a provisional patent license instead usually costing $500-$2,000. This protects the idea for a few years while you talk with others about it and get buy-in or round up capital to take it to the market. Later you can apply for the full patent.
Once you have a patent, you can do multiple things with it. You can take the product or idea to the market yourself, thus getting full profit from it with all the work and overhead. Or you can have someone else do it. You can sell the patent which gives all rights away. Or you can license it and receive royalties. Your payment can be structured in different ways (lump sum, constant percentage based on sales, part equity of the company it’s being licensed to, or flip the tables around and sell it to them then leaseback, or cross-license it for something of theirs).
How much can you make with patents?
The most typical method of royalty payment is a percentage based on the licensee’s sales. There are two main types of licenses for this method – a exclusive license and a non-exclusive license. With a exclusive license you are allowing that one company and no one else to license the patent from you. The price of the patent license can vary greatly, usually between 1%-20% of the sales price. Software and internet patents are usually the highest, followed by pharmaceuticals. The general rule is 25% of the net profit. Say a company would make a 80% profit off your product, then 20% would be a good royalty rate. If it is in a market with lower profit margins and they only expect to make a 10% profit, then 2.5% is a good royalty rate. A non-exclusive license will always be less, maybe a 1/3 of the price would be a good starting point. So, you must find more than 3 companies then to buy your patent in order to make more money than with an exclusive license.
Who can you sell patents to?
You can seek out the companies you feel it would benefit the most and talk with them. Otherwise, any place there’s inventors online, there are companies wanting to buy patents. New inventions are the life-blood of most industries.
What if someone tries to steal your idea?
If someone then infringes on your patent, gather all the evidence you can and take in to a patent lawyer. Some patent lawyers will review cases and choose whether or not to go after it for free. Free at first that is. If the case is won, they get a hefty payout, and if it’s not, you don’t owe anything. You’d need to convince them it is a good case though. Otherwise, extensive patent litigation can go into the millions. But some cases, much like one lost by Blackberry had a half a billion dollar payout. So, if you’re being infringed upon, it might be in your best interest to sit on it and bring it up a couple years down the road when the company is making a billion off it. If they are truly infringing they will have to pay you what they earned off it.
This is more or less an overview to help you learn how to make money off patent royalties. To actually tell someone step by step it requires an entire book. If you’re great at coming up with new ideas I highly recommend pursuing it, and learning businessmen and investor motivations so you can pull some strings. Many inventors do not go beyond the idea, or the patent.
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