Patent monetization is the generation of revenue by selling or licensing patents. Patent applications can be expensive. Independent inventors and small businesses, such as startups, need to spend their money wisely. If small businesses decide to pursue patent applications, the ability to monetize those patents is extremely important.
If a small business has a new and unique technology, the upside of investing in a patent can be enormous. There are ways to get a sense of how valuable a patent of the invention would be prior to paying for and submitting a patent application.
Prior to submitting a utility application, it is important to acquire a professional patentability search and analysis. The results of the search allow the inventor to assess how crowded the art field is and how unique the invention is. If the art field of invention is crowded and the ability to acquire a patent is dependent on narrow claims, the patent will likely not be very valuable and it may not be in the best interest for the inventor to allocate limited funds on a patent application. If the results of the search confirm that the invention is unique, the patent will more likely have broader coverage, making the patent potentially more valuable.
Another important assessment for patent monetization is determining how marketable the invention is. If the invention sells well, the patent is more valuable. However, it is also important to file a patent application as quickly as possible since the patent office awards priority to the invention that is filed first. For inventors with limited funds, a provisional application is viable option.
The provisional application is a holding spot in which a filing date is established, and the invention is considered patent pending. The inventor is given twelve months to determine if they would like to file the non-provisional utility application (actual patent application) and claim the filing date of the provisional application. The provisional application is considerably less expensive than a non-provisional utility application. Therefore, an inventor may first file a provisional application and then try to determine how marketable the invention is by either making and selling the invention or presenting the invention to potentially interested parties in an attempt to either outright sell or license the invention.
It is likely in the best interest of the inventor to file a utility patent application after determining the invention is unique and marketable. During the drafting and the examination of the application, it is the duty of the patent attorney to acquire allowability for the broadest possible claims of the invention to maximize the value of the inventor’s patent.
There are multiple strategies in which small businesses may monetize a patent during its pendency and once the patent has been granted. Patents or patent portfolios may be used as collateral to secure a business loan. The loans provide immediate cash flow, which is important for startups or struggling companies. Typically, banks are the lenders for patent backed loans. To determine the amount of the loan, the lenders will have the patents valuated. Patent valuations are based on the demand of the invention, timing of the demand of the invention, the lifetime of the patent, evidence of use and competition in the market, whether the patent validity has been tested by litigation, and other factors.
If the bank provides a business loan using patent(s) as collateral, the amount of the loan will typically range between 10% and 40% of the valuation, due to the uncertainties of a patent valuation. Once a loan has been granted, a security agreement is registered with the U.S. Patent Office and is made available to the public. The security agreement outlines the terms of the loan and specifies that if the loan is not paid off within a certain amount of time, the lender will acquire ownership of the patent(s). Once the loan has been paid off, the security agreement is released, and the assignee retains ownership of the patent.
Manufacturing companies may monetize a patent or patent portfolio by a sale and lease back. Sale and lease backs are particularly useful for small manufacturers or any manufacturer that needs immediate cash. A sale and lease back involves a specialized institution (lessor) purchasing a patent or patent portfolio from a company (lessee). The company then agrees to pay a licensing fee plus interest to allow the company to continue to make and sell the invention. The sale and lease back allows a company to effectively sell the rights to enforce the patent in court and retain the rights needed to conduct business. A sale and lease back is particularly useful for companies that do not have the means to enforce the patent(s). The company walks away with a check, a license to make the product, and a more realistic enforcement threat against competitors. Depending on the structure of the deal, the lessee may have the opportunity to repurchase the patent at the end of the license agreement.
Independent inventors are likely not as interested in making and selling their own products. However, it still may be in the best interest of the independent inventor to create a company and assign the rights of the patent to the company. This allows the owner of the company to sell ownership interests (shares) in the company, which allows the company to raise money during development of the inventions. Further development of the invention may lead to a sale of the company or patent(s) to a larger complete in a complete cash-out.
If possible, for those not interested in making and selling their own products, a license or an outright sale of the patent is most desirable. A license allows the inventor to retain ownership of the patent while receiving a royalty. Alternatively, the patent holder may prefer an outright sale to a large company. Large companies like to purchase patents to boost their patent portfolios and to own a large amount of patents within the same technology field. By doing so, the large companies prevent possible infringement of the purchased patent(s) and further discourage competitors from entering the field. The outright sale of the patent is beneficial to the inventor since the inventor receives a lump sum of money and can move on to their next project.
Posted in: Intellectual Property - Patents