HOW TO ARRIVE AT THE VALUE OF A PATENT
Most inventors are not concerned so much about the fame or honor their
inventions will bring them, or how much their inventions will advance
civilization, or build up a nation, or administer to the conveniences
and pleasures of mankind generally, as they are about how much it will
net them in dollars and cents; but the patentee should not lose sight of
the fact that the profits are in the exact proportion to the actual
usefulness of the invention, and its general adaptability. It is
immaterial whether the inventor himself intends to deal with the public,
or to deal with a man or set of men who are afterward to deal with the
public, the conditions are the same, and the profits must ultimately
come from the sale of the manufactured article.
[Sidenote: Pecuniary Value.]
It may seem superfluous to say that mere Letters Patent aside from an
invention is of no value, though many inventors are under the erroneous
impression that if an invention possesses patentability, it must also
necessarily have pecuniary value. To be of any pecuniary value
whatever, the invention must cover something for which there is a
demand, or for which there can be a demand created, for it cannot be
disputed, that if an invention will not bring in money by manufacturing
it, it is, in a financial sense, worthless; and the patent thereon is
therefore worth some seventy or eighty dollars less than nothing.
[Sidenote: Commercial Value.]
An invention, to have commercial value, as previously stated, must cover
something for which there is a demand, or for which there can be a
demand created. It may be an entirely new device, or it may be an
improvement upon an existing invention, but in any event it must contain
a certain degree of utility. In rare cases inventors are able to hit
upon an invention in an entirely new field; for these a demand has to be
created. For improvements, however, as a general thing, the demand
already exists; then the important question arises in determining the
commercial value of the patent. "Does the invention in question possess
sufficient merit to successfully compete with existing devices of the
same class?" In order to do this, it must be of a simpler or cheaper
construction, so that it can be manufactured and put on the market at a
lower figure; or, it must yield better results, work quicker and at less
expense, or economize power, labor, or time. A patented improvement
upon an article that can be sold more cheaply, or one which will yield
better results than those now selling well on the market, has a decided
commercial value and can easily be disposed of at a good price. If the
inventor be fortunate enough to combine both of these features in his
invention, the value is doubled and success certain.
[Sidenote: Basis for Estimation.]
Perhaps one of the hardest questions that confronts the patentee is how
to arrive at a just valuation of his patent, and to know just exactly
what he should receive for it. This is a very important question, and
one which should be looked into before undertaking negotiations.
Patentees should not, of course, undervalue their patents, or accept the
first small offer made for fear of not receiving another; at the same
time, they should not fall into the common error of asking a price that
cannot be obtained, which too frequently precludes all chances of a
sale. Many business men would rather lose the patent than waste their
time constantly dickering about an unreasonable price.
Inventors should be reasonable in their demands, and consider that the
purchaser must have a fair share of the profits. He cannot expect to
realize all there is in the patent himself. Indeed, patentees usually
find that men willing to establish a business on the basis of their
untried patents will require the greater bulk of the profits to be
derived from it.
[Sidenote: General Rules for Valuation.]
It is evident that only the most general rules for valuation can be
given, as each invention must be studied and valued strictly upon its
own merits. Undoubtedly, the best and most practical method of
ascertaining the value of any invention which is susceptible of being
manufactured on a small scale is to have a limited quantity of the
articles manufactured--say five hundred or a thousand--and try the
experiment of introducing them in a small territory; that is, in a
certain county, city, or town, taking great precaution in selecting a
person who is capable of carrying forward the business in a
business-like manner. This method demonstrates conclusively whether or
not the invention will meet with success, and with these figures at hand
the patentee will be prepared to prove, to the satisfaction of
interested parties, just what the patent is really worth.
This method of procedure not only enables the patentee to get a just
valuation of his patent, but also puts it in a more favorable position
to be sold; since the commercial value is known and established, it no
longer remains an experiment. Interested parties can take their
calculations from these figures, and the patentee can exact a price in
proportion to the success of the trial experiment.
In order to thus demonstrate the value of a patent, the patentee must
possess and advance the necessary means to carry it forward, though, if
the experiment prove at all successful, the profits derived from the
articles sold will in nearly all cases more than offset the expense
incurred. This is a very popular course with inventors, especially in
handling small inventions, known as novelty or specialty patents.
If the patentee have not the means to successfully demonstrate the value
of his patent by actual trial, as above outlined, then the next best
course would be to inquire among reliable manufacturers and ascertain
the lowest price for which the invention can be manufactured in large
quantities, and the highest price at which it will retail; and then, by
carefully studying the market, the patentee should be able to estimate
the amount of competition, cost of selling, probable number of sales,
interest on the investment, etc., and on these figures base the price he
should receive for the patent, being careful to allow the purchaser a
liberally fair profit.
While there are at present about ninety-five million inhabitants in the
United States, it is scarcely probable that any invention has yet or
ever will be made that will reach half this number of people. With an
article of the most general adaptability, including both sexes, the
inventor can hardly hope to reach more than a fourth of the entire
population, though, of course, the invention may be subject to regular
consumption, so that the people reached would naturally purchase the
article again a number of times during the course of a year.
The statistics in the last chapter are given with the view of assisting
patentees in determining what proportion of the population will likely
want their inventions, and to enable them to estimate prices. In
estimating the price to ask for a patent, patentees should not conceive
and hang their hopes upon fabulous prices and immediate wealth, which
too often dooms ambitious inventors to bitter disappointment; they
should rather endeavor to look at their inventions from the purchaser's
stand-point, and try to see it in the light in which others view it. It
may be well to remember that the million mark of patents issued in the
United States, including re-issues and designs, was passed in 1911, and
it is quite probable that any one inventor may not have the only good
thing in the line of patents.
[Sidenote: How Rating for Royalty Is Figured.]
Many patents are more profitable by being placed upon royalty than by
any other means, and quite often the patent can be placed this way when
it is not possible to sell outright at a satisfactory price. In
determining what royalty the patentee should receive, he should
carefully estimate, in connection with the probable number of sales,
what profit the manufacturer can probably make on each, or a number of
the articles containing the patented improvements, and should require
about twenty-five per cent. of the profits as royalty. Another method
used by some inventors is to ascertain the price at which the article
can be retailed, and figure the royalty at between one-twentieth and
one-tenth of the retail price. Either of the above should give the
approximate figure to ask for exclusive royalty contracts. For
non-exclusive rights the patentee should ask about one-half of that for
exclusive rights.
[Sidenote: Stock in Stock Companies.]
There is another class of patents that can be best realized from by
organizing the proper kind of joint stock companies, and manufacturing
the invention, the inventor taking a certain amount of the stock and
assigning the patent to the company. The patentee should receive between
one-fourth and one-half of the capital stock in consideration of his
assigning his patent and rights to the company.
The inventor should see that a good portion of the stock is subscribed
for and the amount actually paid into the treasury of the company before
making the assignment. As a rule, inventors' stock is full paid and
non-assessable.
[Sidenote: Prices for Territorial Rights.]
In calculating the prices for territorial rights, the application of the
invention to that section must be taken into consideration, as well as
the advancement in manufacturing, etc. If the invention belongs to that
class of inventions which may be generally adapted in all States alike,
such as domestic articles and articles of wearing apparel, then the
population will form a very satisfactory basis for valuation.
There are other inventions, however, that apply almost wholly to a
certain section of the country, while still others apply more to one
section than to another; thus, for instance, mechanical contrivances of
the higher order, such as writing machines, mathematical instruments,
etc., the North and East are the most valuable; for mining and
agricultural implements, etc., the West; while such as the cotton-gin,
seeders, and presses apply almost wholly to the South. States and
counties having large cities and large towns are also usually more
valuable than other States and counties of same population.
[Sidenote: Valuation Tables.]
The following tables are given as a general estimate of the relative
value of the different States and divisions in the majority of cases;
however, these tables are only arbitrary at best, and cannot be applied
to all classes of inventions satisfactorily, though they may serve to
materially aid the patentee in determining what price to put upon each
State in his own case. Having determined the value of the patent as a
whole, the aggregate of the State prices should be about two-thirds
more, as there are always some States that cannot be sold separately,
while others may have to be sold at a discount.
TABLES FOR ESTIMATING PRICES OF STATE RIGHTS
-----------------+--------------------------------------------------
STATES AND | PRICE AS A WHOLE.
TERRITORIES. |---------+---------+----------+----------+--------
| $1,000 | $5,000 | $10,000 | $15,000 | $20,000
-----------------+---------+---------+----------+----------+--------
Maine | 35 | 175 | 350 | 500 | 700
New Hampshire | 30 | 150 | 300 | 450 | 600
Vermont | 30 | 150 | 300 | 450 | 600
Massachusetts | 50 | 225 | 500 | 750 | 1,000
Rhode Island | 20 | 100 | 200 | 300 | 400
Connecticut | 35 | 175 | 350 | 500 | 700
New York | 65 | 300 | 650 | 950 | 1,200
Pennsylvania | 65 | 300 | 650 | 950 | 1,200
New Jersey | 40 | 200 | 400 | 600 | 800
+---------+---------+----------+----------+--------
N. ATLANTIC | $370 | $1,775 | $3,700 | $5,450 |$7,200
DIVISION | | | | |
-----------------+---------+---------+----------+----------+--------
TABLES FOR ESTIMATING PRICES OF STATE RIGHTS--_Continued_
-----------------+--------------------------------------------------
STATES AND | PRICE AS A WHOLE.
TERRITORIES. |---------+---------+----------+----------+--------
| $1,000 | $5,000 | $10,000 | $15,000 | $20,000
-----------------+---------+---------+----------+----------+--------
Delaware | 20 | 100 | 200 | 300 | 400
Maryland | 40 | 200 | 400 | 600 | 800
District of | 15 | 75 | 150 | 200 | 300
Columbia | | | | |
Virginia | 35 | 200 | 400 | 600 | 800
West Virginia | 35 | 175 | 300 | 500 | 700
North Carolina | 35 | 150 | 300 | 450 | 600
South Carolina | 35 | 150 | 350 | 500 | 700
Georgia | 40 | 200 | 400 | 600 | 800
Florida | 15 | 75 | 150 | 200 | 300
+---------+---------+----------+----------+--------
S. ATLANTIC | $270 | $1,325 | $2,700 | $3,950 |$5,400
DIVISION | | | | |
| | | | |
Ohio | 60 | 300 | 600 | 900 | 1,100
Indiana | 55 | 275 | 550 | 800 | 1,000
Illinois | 65 | 300 | 650 | 950 | 1,200
Michigan | 45 | 200 | 350 | 600 | 800
Wisconsin | 40 | 150 | 275 | 400 | 500
Minnesota | 45 | 200 | 350 | 600 | 800
Iowa | 40 | 175 | 350 | 500 | 700
Missouri | 45 | 225 | 450 | 650 | 900
North Dakota | 25 | 75 | 150 | 200 | 300
South Dakota | 30 | 100 | 200 | 300 | 400
Nebraska | 30 | 150 | 300 | 450 | 600
Kansas | 40 | 175 | 300 | 500 | 700
+---------+---------+----------+----------+--------
N. CENTRAL | $485 | $2,325 | $4,525 | $6,850 |$9,000
DIVISION | | | | |
-----------------+---------+---------+----------+----------+--------
TABLES FOR ESTIMATING PRICES OF STATE RIGHTS--_Continued_
-----------------+--------------------------------------------------
STATES AND | PRICE AS A WHOLE.
TERRITORIES. |---------+---------+----------+----------+--------
| $1,000 | $5,000 | $10,000 | $15,000 | $20,000
-----------------+---------+---------+----------+----------+----------
Kentucky | 40 | 200 | 375 | 600 | 700
Tennessee | 30 | 175 | 350 | 500 | 700
Alabama | 30 | 150 | 300 | 450 | 600
Mississippi | 30 | 150 | 300 | 450 | 600
Louisiana | 35 | 175 | 300 | 500 | 700
Texas | 35 | 175 | 300 | 500 | 700
Oklahoma | 20 | 100 | 200 | 300 | 400
Arkansas | 20 | 75 | 150 | 200 | 300
+---------+---------+----------+----------+--------
S. CENTRAL | $230 | $1,200 | $2,275 | $3,500 |$4,700
DIVISION | | | | |
| | | | |
Montana | 15 | 100 | 175 | 250 | 300
Colorado | 40 | 175 | 350 | 350 | 700
New Mexico | 15 | 50 | 100 | 150 | 200
Arizona | 15 | 50 | 100 | 150 | 200
Utah | 15 | 50 | 100 | 150 | 200
Idaho | 10 | 50 | 75 | 100 | 200
Washington | 15 | 50 | 100 | 150 | 200
Oregon | 20 | 75 | 125 | 200 | 300
California | 50 | 250 | 450 | 700 | 900
+---------+---------+----------+----------+--------
WESTERN DIVISION | $235 | $975 | $1,800 | $2,750 |$3,700
+=========+=========+==========+==========+========
GRAND TOTAL | $1,600 | $7,600 | $15,000 |$22,500 |$30,000
-----------------+---------+---------+----------+----------+--------