Problem: You don’t have the resources or capital to mass produce your great invention. So now you have to find someone who does. What do you do to make sure you get paid for your great idea?
There are two ways to go about this. One is “Licensing” and one is “Assignment”. What is the difference between the two?
Imagine you have won the lottery. The Jackpot is $10,000,000 and the state tells you that you have a choice on how to collect. You can either take the money in annual installments for 30 years where you collect the entire $100 mil minus taxes, or you can opt for a lump sum, one time payment of $40,000,000 minus taxes. What do you do?
That would depend on your situation. A young person may be smart to take the 30 annual installments. That way no matter what happens in the stock market or how many friends and relatives pop out of the woodwork, you have guaranteed income. An older person however should take the lump sum. What good is 30 annual installments if you don’t have 30 years left?
Licensing pays the inventor a percentage of the sales. These payments are known as “Royalties”. Typically royalty payments equal about 3% of the gross sales and are paid monthly or annually. Royalty payments on a great selling product can set the inventor up for life.
But, what if the inventor is not that confident that the product will be a huge seller and he/she is being offered a nice lump sum to sell now? This is known as an “’Assignment”. The inventor gives up all rights for a one-time cash payment.
This is sometimes a tough call for the inventor. There is a huge risk either way. If you take the assignment option, you could be leaving huge profits. But if the product ends up failing, 3% of zero is zero. You could be regretting not taking the lump sum of cash.
There really is no right or wrong answer for the inventor on this one. It would probably have to be based upon the inventor’s needs at the time. Age, debt, and obligations will weigh heavy in the decision on whether to take the “bird in the hand” over the “two in the bush.”