Advantages and disadvantages of licensing patents
Patents are a big capital investment for small or start-up businesses. If you don't have the money to manufacture or sell your own product, or you simply choose not to, you can license it to someone else.
Benefits of patent licensing
For patent owners, the licensing model offers the following advantages:
- You don't need to find money to commercialise your product - The licensee will be responsible for costs of manufacturing, distribution, packaging, marketing and sales, etc.
- You can get your innovation to market faster - If you issue a licence to an established business, you will be able to leverage their experience, infrastructure and involvement. They will typically be more able to move your product into the marketplace more easily and quickly.
- You can break into new markets - Depending on the deal and the licensee, you may be able to access markets that are closed to imports, avoid export taxes or mitigate risks associated with international expansion.
- You will be able to generate revenue - The licensee will pay for the right to hold the licence to your patent. This can be a one-off payment, continuous payments known as royalties, or variable payments depending on the profits.
- You keep ownership of your intellectual property - Licensing allows you to give suppliers, competitors or complementary businesses certain rights over your patent while receiving royalty income and still retaining ownership of your asset.
To be successful, a licensing arrangement should benefit all the parties involved. By acquiring rights to a patent, a licensee can:
- create new products, services and market opportunities for themselves
- reduce costs to acquire new technologies, without having to develop their own
- save time getting a new product to market
- gain a competitive advantage over rivals, especially if their licence is exclusive
If put into place correctly, licensing can be lucrative and mutually beneficial to both the patent and the licence holder. However, licensing can also increase potential competition and risks for both parties, so it's important to consider potential pitfalls.
Disadvantages of licensing patents
It can take a lot of effort and determination to find the right licensee. To give your product the greatest chances of success, you should put a lot of thought into evaluating potential licensees and structuring your licensing agreement.
Other potential risks and downsides to patent licensing include:
- loss of control (partially or fully) over your invention
- relying on the licensee's ability to effectively commercialise your patent
- risk of poor strategy or execution damaging the product success
- poor quality management damaging your brand or product reputation
In addition, by licensing out your product, you are effectively creating competition for yourself. You may try to limit the scope of the license as much as possible to avoid giving your competitors unnecessary advantage in the marketplace.
Keep in mind that you will need to manage your relationship with the licensee carefully. If things go wrong, you may find yourself in disputes or needing to cover legal costs. Before you sign over any rights to your patent, it's worth doing due diligence checks on any potential licensees to assess their suitability and track record.
If you decide to sell or license your patent, you should keep detailed records of any contracts or agreements you have made. Seek legal advice if in doubt.