Licensing . . .

is an arrangement whereby an inventor grants another person or company the right to make, use or sell his invention. In many cases, licensing is a viable alternative to starting a company and raising capital. Licensing of an invention can be very profitable to the inventor if the invention succeeds in the marketplace and the license agreement is properly structured.

In general, an inventor who licenses his technology to another stands to earn less from his invention than one who builds a new company to exploit it. This is because the inventor transfers the risk and cost of developing and marketing his invention to the licensee. On the other hand, because the inventor does not undertake the time-consuming job of starting and financing a new company, his time is available to explore other interests and develop other products, which may provide additional commercial successes.

Sometimes an inventor does better to license his product rather than trying to build a new company around it. If the product requires a large capital investment or if the marketplace for it is dominated by a strong competitor, the inventor may be more successful licensing his invention than trying to raise venture capital to start a new company. If the channels of distribution are particularly hard to penetrate or name recognition is especially important to his type of product, it may make more sense to license. In short, when the entrepreneur conducts his market research, he should consider carefully whether his product is one that can be successfully developed and marketed by a new company or whether there are factors that indicate that licensing would be more fruitful. See: Business Plan Format, Franchising, Market Research, Patents, Software Protection, Trade Secrets.