HOW TO CONDUCT THE SALE OF PATENTS--_Continued_
In conducting the sale of patents, the greatest difficulty is most
frequently experienced in getting manufacturers or others sufficiently
interested to look into the merits and possibilities of the invention.
If the inventor can get the parties to actually consent in their own
minds to the proposition of taking up the invention, the question of
terms and conditions can soon be arranged. Until the parties solicited
can see beyond a doubt that there is large profits in it for them, the
price of the patent is out of the question; therefore, the first step is
to demonstrate its merits and commercial value, and get the parties
thoroughly interested.
Patentees should not labor under the impression that because a patent is
offered at a very low price that it will be quickly snapped up as a
bargain; as before stated, if a patent will not bring in money by
manufacturing and selling the article, it is worthless; and its real
value is in exact proportion to the amount of profits that can be made
from its manufacture.
Should the patentee find that his patent has no commercial value, it is
almost useless to spend more time and money in trying to realize
anything from it; he had better start again, and endeavor to invent
something that has value and can be sold.
[Sidenote: Value of Personal Influence.]
Inventors should use the full extent of their personal influence to
spread particulars of their inventions as far as possible, for this
indirect work is often a leading factor in creating a favorable
impression that frequently results in the adaption of an invention.
However unacquainted he may be in a business way, every patentee can,
more or less, in his immediate neighborhood, consult with merchants,
friends, and others in the line of his invention, who can post him upon
the right parties to submit the patent to, and the best way to see them
about it, and perhaps go with him to visit such as might be interested
in the invention.
[Sidenote: Personal Solicitation Advisable.]
In nearly every case it is more satisfactory for the patentee to call on
the manufacturers or interested parties personally whenever it is
possible for him to do so. This brings about a more satisfactory
understanding between them. Many inventors, however, prefer opening up
communication by correspondence, and after the parties manifest a
willingness or desire to look into the invention more closely, then
arrange to visit them personally.
Having determined upon a visit, the patentee should endeavor to get a
friend known by the parties to go with him to make their acquaintance.
If the friend cannot go with the patentee, he will probably give him a
note of introduction. It may happen that his friend does not know the
parties whom the patentee wishes to see, in that event he may know of
someone who does, to whom he can introduce the patentee and who in turn
may either go with him or arrange to make him known to the parties
solicited. An introduction, of course, is not absolutely necessary, but
it invariably has a good effect and is generally worth the effort.
The patentee should be prepared to make a straightforward, business-like
presentation of his invention by means of a suitable model or drawings;
carefully explaining its merits and advantages, showing as clearly as
possible just what the value of the invention is and what can be made
out of it, and giving tangible reasons why it would be to the interest
of the parties solicited to invest in the patent. If the patentee is
dealing with a manufacturer it is well to point out not only the
possible advantage he may have by securing the control of the patent,
but also the possible loss that his business may suffer by allowing one
of his competitors to obtain its control. Many businesses have been
hopelessly crippled by an enterprising firm securing control of a good
patent and introducing a like article that can be sold cheaper, or one
that will do its work in a better and more satisfactory manner.
[Sidenote: Selling Outright.]
Many inventors prefer to sell their patents outright; that is, in
consideration of a specified sum of money the patentee assigns his
entire interest in the patent, in the same manner that a person would
sell a piece of real estate. This is a very good method and one of the
quickest ways for the patentee to turn his invention into money, though
it must be remembered that to sell a patent outright is usually for a
very much smaller sum than could be realized if handled by other
methods.
The day for obtaining enormous sums or fortunes from the sale of a
patent outright is past; at present to realize any considerable amount,
the patentee generally has to share in the risks as well as the profits,
unless the invention is very highly developed, and even then he cannot
expect to get as much out of an outright assignment as he could by
sharing in the success of the invention commercially. If, however, the
patentee is content to take the utmost cash his patent will bring him
outright, he is assured of a principal or lump sum, free from any
chances of the article not selling well when placed upon the market.
Before signing and delivering the assignment, the patentee will, of
course, see that he has the consideration, or its equivalent, for which
the assignment is made. If the transaction is made through
correspondence he should send the assignment duly executed to the
purchaser through the bank or express C. O. D. for the amount.
[Sidenote: Assigning an Undivided Interest.]
In a preceding chapter, the dangers and disadvantages of an undivided
interest are set forth, and it cannot be considered a wise course under
any consideration to part with any undivided interest in the
proprietorship of the patent, unless unusually well paid, or there
exists an agreement of copartnership between the patentee and the
assignee. By such an assignment, no matter how small, the patentee loses
control of his patent.
[Sidenote: Dividing a Patent into Different Classes of Rights.]
Many patents, from the nature of the invention, can be subdivided into
different classes of rights, and each class sold or granted separately
as the patentee may choose. Thus, the patentee of a tire, or other
appliances for a bicycle, could license one party to make the same for
bicycles and another for automobiles. In like manner a car-coupler could
be divided between those who build railway equipments and those who
build street-cars, and so on.
Goodyear, the inventor of the process of vulcanizing rubber, divided
his patent up into many different rights, licensing one company for
manufacturing rubber combs, licensing another for hose pipes, another
for shoes, another for clothing, and a number of other different rights,
for which each company or partner paid a tariff. Lyall, inventor of the
continuous loom, also divided his patent into many different rights; one
company weaving carpets, another corsets, another bags, another
sheeting, etc.
In every case where the invention covers articles not in the same line
of manufacture, the patentee should not fail to divide the rights into
different classes, granting each party only such rights as they may be
interested in. In this way the patentee can quite often double or treble
the receipts from his invention.
The patentee may, if he desires, have his machines built and require the
purchasers to pay him a regular annual rental on each machine, or a
tariff upon the goods produced, in addition to the price of the machine.
Companies are sometimes organized to manufacture an invention, and
employ travelling men to place the article on annual rental instead of
selling.
[Sidenote: Selling by Territorial Rights.]
Another method is to sell State and county rights. This consists of a
license whereby the patentee, in consideration of a certain sum of money
paid him, grants unto another person or persons the exclusive right to
make and sell the invention, and to authorize others to make and sell
the same, within a specified territory, during the life of the patent.
This plan of disposing of a patent has often been highly profitable, but
it must be said that these territorial sales have been conducted in such
a manner in the past, as to bring the whole system of selling patent
rights into disrepute, and in recent years patentees have found some
difficulty in making sales in this way, unless the device is of unusual
great novelty and attraction to householders or the general public.
Occasionally, however, there are patents issued for meritorious
inventions that are susceptible of this mode of procedure, and which can
be disposed of to the greatest advantage by territorial grants. Such
inventions as household novelties possessing great merit and utility
have been most successfully placed upon this plan, but it must be
remembered that the value of the system rests upon its capabilities of
effecting sales of the manufactured article to a vast proportion of the
people.
In selling territorial rights it is a mistake to begin with the small
places with the idea of working the business up and effecting larger
sales on the basis of the smaller ones; it is better to shove the sales,
as much as possible in the start, and after the more valuable portion
of the territory is disposed of, proceed with the balance until it
ceases to be profitable.
Experience teaches that it is usually advisable to accept any reasonable
offer made for a small right, even if it does not come up to the
patentee's estimate of its value, as he has plenty of other territory
left, and may lose much time and money in finding another in the same
territory willing to pay more; besides, the purchaser of such a right
may, by his energy and good judgment, advertise the invention in such a
way as to greatly benefit the patentee in making further sales.
Some patentees employ good and reliable special agents to travel and
dispose of the patent rights; others advertise for and appoint State
agents to sell their respective county rights. In either case these
agents expect to make money by the operation, and require a liberal
proportion of the proceeds for their remuneration; generally speaking,
they will require about one-third the selling price, unless the patentee
can show that the rights will sell readily, in which case the rating can
be made lower.
[Sidenote: Granting Licenses.]
The patentee may also sell licenses under his patent; that is, in
consideration of a certain sum, the patentee licenses a manufacturer to
make the invention at his own place of business; it being a personal
privilege and is not transferable unless its terms so state.
Unless there are a great many manufacturers in the line of industry to
which the patent relates, and unless the invention has real merit so
that it will be readily adapted by the manufacturers, the patentee
cannot hope to realize any considerable amount from selling shop-rights
alone. As a general thing, patents for mechanical inventions can be
disposed of to better advantage by other means, or by selling
shop-rights in connection with other methods; for example, if the
patentee was selling his patent by territorial grants, he might grant
shop-rights in such territory as he has not sold; or if he is placing
the patent upon non-exclusive royalty contracts, he could grant
shop-rights in such portions of the territory as he does not contemplate
using otherwise.
Some inventions, such as methods or processes, as a general rule, have
to ultimately be sold by licenses. Such patents can be employed most
profitably by selling licenses, county and State rights; thus, in the
case of a method of constructing fences, the patentee could sell State
and county rights to parties, who in turn could grant farm rights, etc.
[Sidenote: Placing upon Royalty.]
The license and royalty plan is perhaps the best and most popular method
with inventors for realizing from their inventions. This, in effect,
involves a contract between the patentee and the manufacturer, by which
the latter in consideration of a license to manufacture the article
covered by the patent, agrees to pay the patentee a certain specified
sum as royalty for each article manufactured or sold bearing the
patented improvement.
Placing a patent on royalty is ordinarily taking chances, but if the
patentee has full confidence in his article selling well, he should by
all means take royalty in preference to selling the patent in its
entirety. Many valuable patents are sold by their owners for from $1,000
to $10,000, which yield the purchasers, when the article is on the
market and selling well, as much as $25,000 annually in profits. This
calls to the author's mind a patent for which at the outset was
doubtfully offered $3,000, but before the negotiations terminated, the
patentee succeeded in placing it upon an exclusive royalty basis. The
royalties paid to the patentee during the first four years amounted to
over $50,000, and the manufacturers subsequently made an offer of
$100,000, for the patent.
In making royalty contracts with parties, the patentee should
investigate the standing, rating, and capabilities of the manufacturer,
and, above all, should be certain that the parties have the right motive
in view, and that the contract is so drawn that it will fully protect
his own interests. Many patentees have been caught by manufacturers
offering large royalties for the sole purpose of gaining possession of
the patent, that they might pigeon-hole it, in order to keep the article
out of the market, so that the sale of some similar article in which
they are interested would not be interfered with by the introduction of
a similar or better article, such as the patent anticipates.
There are others who propose and make royalty contracts with patentees
with no other object than that of making the special tools, patterns,
dies, etc., for which they charge the patentee an extortionate price.
The best and safest way for the patentee to guard against having his
patent tied up is to bind the parties to do certain things in the way of
pushing the sales, making the necessary tools at their own expense, and
commencing its manufacture within a reasonable time, paying an advance
royalty, or annexing some such condition to the agreement by which they
will be the loser should they fail to push the inventor's interests.
Unless it cannot be otherwise arranged, the patentee should not transfer
his rights merely in consideration of receiving a certain sum on each
article sold, as however sterling the character of the manufacturer,
there would be no certainty of the sales being pushed. The patentee
should endeavor to get the manufacturer to guarantee that the royalties
shall amount to at least a certain pre-stipulated sum each year, or
within a period of time, and that such sum shall absolutely be paid to
him by the manufacturer, irrespective of sales. This insures that the
manufacturer will be obliged to push the sales of the article, and do it
justice, since if he neglects his duty purposely, or from lack of
energy, he is out of pocket, and the patentee is sure of a certain
income, with the addition of a possible fortune that unprecedented sales
may yield him. However, manufacturers are not always willing to agree to
this condition, unless the guaranteed amount is exceedingly reasonable;
they will usually simply agree to do their best, and if the sales do not
reach a certain figure each year, the patentee shall have the option of
cancelling the agreement, and receiving back the patent free and clear.
Royalty licenses can either be exclusive or non-exclusive; that is, with
an exclusive contract the manufacturer has the exclusive right to
manufacture the article, excluding all others; non-exclusive is simply a
shop-right, in consideration of which the manufacturer agrees to pay the
patentee or owner of the patent a stipulated price or percentage upon
each article made or sold. The license can also be exclusive in a
certain section, county, State, or a number of States, as may be agreed
upon.
Any number of conditions that may be agreed upon may be annexed to and
form a part of the contract, and such an agreement should be drawn up in
compliance with the terms and conditions agreed upon by a competent
attorney, or one skilled in matters of this kind.
[Sidenote: Manufacturing and Forming Companies.]
If the patentee has a really good invention, often he cannot do better
than to retain the patent and work it himself, in case he has the
ability to do so. If he cannot conduct the manufacturing alone, he may
be able to secure a partner with just sufficient funds, and equal common
sense and business acumen, to add the necessary elements to the firm to
achieve success.
In some cases, if the patentee does not wish to retain the whole patent
for his own use, an excellent plan is to commence the manufacture of the
invention in a suitable locality, and after the business is so far under
way as to show progress and profit, then sell out the business with
license under the patent. To illustrate: a gentleman in Illinois, having
obtained a patent on a farming implement, succeeded in interesting a
party in his own neighborhood to join with him in its manufacture, which
soon proved successful and remunerative, and in a short time he was able
to sell out his interest in the business to his partner, with license
under the patent, after which the patentee started its manufacture in a
number of places elsewhere, and, at the same time, granting licenses and
selling territory in still other sections, where he was unable to work
the invention. In this way he made a fair fortune from his invention,
realizing about as much from each business established as he could have
probably obtained for the entire patent if sold outright at first.
In this manner the patentee, with a valuable patent on an article of
general usefulness, could go on and establish its manufacture in any
number of places, and sell out with license under the patent. If the
first experiment is successful, it is an easy matter to carry the method
out in other places, and the business can be readily disposed of
anywhere, if it can be shown to be on a paying basis.
[Sidenote: To Organize Stock Companies]
In recent years many inventors have been quite successful in organizing
stock companies on the basis of their patents. This is considered one of
the best ways for handling patents for large and promising inventions,
and it is a method that any patentee, with ordinary business ability,
should be able to carry out successfully, providing his invention is of
sufficient merit and importance to form a suitable basis for a
successful stock company.
Many stock companies are incorporated under the laws of New Jersey, but
it is believed the State of West Virginia is also very favorable to
corporations. The entire expense for incorporating a company under the
laws of the latter State should not exceed $150. The company can be
incorporated for any amount; large or small, one hundred dollars or five
millions, cost and fees being the same. The incorporators need not be
residents of the State. No annual statements required. The meetings of
the directors can be held at any place, and need not be held in the
State where the charter is granted.
Before applying for a charter for a corporation or stock company, the
patentee should mention his plan to some of his friends and get five
persons who will promise to subscribe for one or more shares of the
stock and act as incorporators of the company.
Next he should secure the services of a reliable attorney, familiar with
corporation laws, to prepare the necessary articles of incorporation and
legal papers. The attorney will advise the patentee how to proceed
properly in organizing his company, and as to the securing of the stock
certificates, subscription blanks, seal, etc. These, including the
attorney's fee, should not cost the patentee more than $50.
It is well to have some stationery printed with the proposed name of the
company and business displayed thereon; and also a prospectus
published, setting forth the invention and the plans of the company for
introducing it, etc.
Quite often the patentee can find enough idle capital in his immediate
neighborhood to float a good portion of the stock. Capital is more
easily secured by the formation of a stock company than by any other
means, as people can subscribe for small or large amounts, and they
often prove good investments.
In soliciting subscriptions for stock, it is desirable to get as many
prominent and influential men to buy one or more shares at first to head
the list--their names will be a great aid in making further sales.
Ordinarily the promoter only collects ten per cent, of the amount
subscribed, the balance being subject to the call of the board of
directors.
After it is ascertained that the shares or stock are being rapidly
subscribed for and selling fully up to expectation, the patentee can
have the incorporators sign the charter application and have the
attorney file it with the proper State authorities. This will cost the
patentee about $100 more, for State tax, attorney fees, etc.
When sufficient stock has been subscribed for, a meeting of the
stockholders should be called to elect directors, and to transact such
other business as may be deemed necessary in regard to locating and
building the plant and getting the company in shape.
The patentee should receive about one-half the capital stock in
consideration of his transferring his rights and franchises to the
corporation, the remainder of the stock is sold for the benefit of the
company to create a working capital. The patentee may sell a portion of
his stock, if he desires, but should also retain a good portion of it to
show his own confidence in the business.
After the meeting of the stockholders, the direction of the business
will probably be taken out of the hands of the inventor, and the control
will lie in the board of directors of the company. As a rule it is
better that the inventor does not take an active part in the management
of the company's affairs, unless he is specially fitted for the
position.
If the company is provided with ample capital, and if the business
manager is a competent man, there is little chance of failure if the
invention has real merit.
[Sidenote: Trading as a Last Resort.]
Patentees are sometimes offered securities or other property in trade
for a patent. It is not deemed a wise course by most inventors to
consider any proposition for a trade, especially in the early life of a
patent. Only as a last resort, after failing to realize from a patent by
any other means, is it advisable to trade a patent; and, before finally
agreeing upon a trade, the patentee should have a reputable attorney to
look fully into the value and title of the property offered. He should
also insist upon receiving an abstract of title, or a title guarantee
from a reliable title insurance company.
Unless known to himself, the patentee should never engage the services
of an attorney or broker recommended by the parties offering the trade
to look into the value and title of the property. Inventors should be on
the lookout for a set of sharpers who make a business of offering
worthless securities and property in exchange for patents.