License to profit: could licensing your intellectual property provide the extra capital you've been looking for?

Entrepreneur, Jan, 2004 by David Worrell

Ambient divides its licensees into two broad categories: consumer electronics and "other." Since the adoption of Ambient technology is still in its infancy--but has such broad application--it's not difficult to manage the different licenses, says Hyatt. "We haven't yet had a situation where an existing company is going into the same market as another start-up."

Nonetheless, managing and monitoring licenses can become a complex and time-consuming task. There will always be issues of compliance, reporting and quality control. Quality is especially important, says Auslander, since poor quality can lead to liability issues and could even cause you to lose protection under trademark laws. "You may want to see a sample from each manufacturing run or see [the licensees'] marketing and advertising for approval," she says. Don't forget that you retain ultimate ownership of the intellectual property, so any product or derivative should be marked with something that protects your rights, such as TM, [c] or the patent number.

Weiner and Auslander agree that license agreements can go bad, so be prepared. "Good fences make good neighbors," says Weiner. "We trust everybody--subject to verification. Be prepared to audit the results annually." As a rule of thumb, expect to pay about 1 percent of your revenues for a thorough audit by a CPA.

Is licensing a distraction? It absolutely can be. On the other hand, few other aspects of your business hold such potential wealth. As Hyatt and the Ambient team mined the value of their intellectual property, they found that licensing partners provided not only financial capital, but also human and market capital. Says Hyatt, "What I see is a lot of outside companies worrying about this while we're not. It's only 5 percent of my time, but the licensee is spending 100 percent of their time trying to make the product successful."

Internet buyers will spend an estimated $839

MILLION

online this year vs. $677

MILLION

in 2003.

DAVID WORRELL is author of the e-book Finding Funding. Contact him at david@dworrell.com.