There are two facts that are important with regard to seeking licensing partners. First, the potential financial return from licensing or selling is much less than if one were to manufacture and sell a finished product developed from the technology. When a technology is licensed, a company is agreeing to take on the financial risk of getting a product to the marketplace. They will reap the bigger benefit from the sales of the product. Secondly, it is often difficult to find a commercialization partner interested in university technologies. For many reasons, companies prefer to develop products in-house through their own research and development departments, and may be reluctant to work with an "outsider."
There are rules of thumb, but no set terms for agreements between inventors and companies. Each agreement must be negotiated individually to satisfy the unique circumstances of each case. Two types of agreements are commonly used: sales agreements and licensing agreements. Each is described below:
Sales Agreement. In this type of agreement, the company pays a lump sum for your idea and anything else that may be of value to the company (prototypes, descriptions, documentation, trademarks, etc.). The amount of payment is an estimate of market potential. A rule of thumb is the cost of inventing divided by the cost of commercialization, usually about a 1:10 ratio. Therefore, you may receive about 10% of the total expected profit to be made from the product. Often, the inventor will get less than 10% because there is no guarantee there will be any profit, and in this situation it is the company taking the risk.
Licensing Agreement. This is the more common type of agreement. It is usually preferred by both parties because the payoff is based on actual sales rather than expected profit. Again, terms of licensing agreements are highly variable, but they usually include royalty, up front payment or fees, due diligence, exclusivity clause and a term. For further information on these terms click on the links below: