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[mowpar]

OK

[Patentstudent]

Going for a percentage of profit may sometimes seem lucrative, but how do you define the profit? What is the chance that the licensee allocates certain costs to the product to artificially lower the profit. I hope you get my point.
In licensing out, forget about a percentage of profit and opt for a percentage of sales.
BTW, include a minimum annual sales target in your licensing agreement.
   

[Yak]

Mowpar,

It seems to me, that you are asking very similar questions in various different forum topic sections looking for the information you want.  It also seems you are unfamiliar with negotiation, licensing, and product development in general.  It is good you are looking for information within these forums, but you really need to talk to a professional, knowledgeable in product licensing.  That individual will be able to answer all of your specific questions. 

I have mentioned this previously in response to one of your similar posts, but I think your expectations may be a little high.  Also a good license agreement will explicitly state how profits are defined and what constitutes "sales".  From my experience, most companies who are in the business of licensing IP rights will have a standard licensing agreement which will be used as a starting point.  Many licenses also include defining annual sales targets and terms of renewal, often times based upon the annual sales targets. 

[Patentstudent]

Maybe it is a good idea to buy a book like 'From patent to profit' written by 'Bob DeMatteis.

You can preview parts of the book on google.books.com
Follow this link:
http://books.google.com/books?id=7G5A2pyvCQUC&pg=PA330&dq=licensing+agreement+sample&cd=10#v=onepage&q=licensing%20agreement%20sample&f=false

[doug vagedes]

Some key points to consider;

Licensee (company) will want an exclusive, best for them.  If you have to allow it make sure there is a preformance clause and term.  That is, they must meet a minimum sales amount within a certain timeframe.  If they don't meet the deadline, patent reverts back to you.

Being paid royalty on net sales vs net income per unit doesn't have to be a deal breaker.  % per unit on net income is ok, as long as in the agreement it's stipulated that general accounting practices are to be followed.  Same with net sales.  Spell it out how and where certain expenses will be accounted.  And you should write in the contract that you have the right to audit the books, at least once a year.

If they or you improve upon patent, who owns?  If you make improvements, % should be adjusted accordingly.  All improvements transfer to inventor after contract expires.

Hold you harmless if they create a liability through neglect.

Just a few...

[Isaac]

So which is actually more profitable, same % of sale, or same % of profit.

Percentage of sales price would be larger.    How much larger depends on how profit is calculated (namely, what things count as expenses when calculating profit). 

[Patentstudent]

You said something  about making  sure they meet sales quotas, how would I know what would be acceptable

Usually, during one of the first meetings with a potential licensee it is quite easy to get them to mention some potential sales figures, provided you only ask a few question and let them do most of the talking. Normally I then use their own figures to set the minimum sales criterion.   

[Yak]

I do not have a patent, or even PPA.  I will need for them to sign  a non-disclosure.  This I feel will effect my bargaining power, to some extent.

If they say they want to push forward with it, I have the money to get the patent done.  If that is what they want.

Based upon my interactions with industry, you may have a hard time getting someone to sign a NDA just so they can hear your unpatented "idea" for some new tool and very few probably will, for a variety of reasons.  Situations exist where a company rep has no way of knowing who else you have shown/disclosed your "idea" to and quite often the person you are speaking with may not know what is in development in another area of the the company.  The company rep could sign a NDA not knowing that a similar concept is being developed in house.  Then what, you claim the company store your idea.  That is a pain for the company and bad public relations. 

[doug vagedes]

Yak is pretty much spot on.  But in the event they entertain looking it sounds like you are not even close to negotiating terms of a license agreement but still trying to convince them your idea can be a good investment for them.  Those are the questions you need to be asking yourself.

[JimIvey]

I'll just toss out a few quick observations.

1.  25% is extremely high.  In fact, 25% of gross (sales) is entirely impractical if the profit margin is less than that -- and it often is.  A few decades ago when there were fewer patents on each product/process, I heard that 5-10% was not unreasonable.  Now, I understand that 2% is considered very high.  And, I think that was of profits, not gross, but I could be wrong. 

I'm not suggesting that no one will ever get 25% of profits in a patent license.  But, if you do, take it and run!  And don't grumble and tell people you could have gotten more.

2.  I think there's a huge difference between pointing out obstacles and raising obstacles.  Don't blame the weather person (meteorologist) if it rains.  It's good (great, even) to believe you can beat the odds, but you really ought to know what the odds are.  Gambling is a tax on people who are bad at math.

3.  I've said many times that patents are complex business tools.  They're not cheap, and they're not easy to get.  A clever idea is an opportunity, but no one is guaranteed the means to take full advantage of all opportunities they come across. 

A while ago, I had heard that stocks (and the Dow Jones in particular) was down around 50%.  I wanted to buy, buy, buy ....  (you know, buy low, sell high, but everyone else seems to do the opposite).  But, guess what.  Since the economy was in the tank and I'm self-employed (and other things going on in my life at the time), I had no cash with which to buy, buy, buy....  I heard the other day that the market has regained 75% of its losses.  (Forgive me if I'm wrong or mis-heard something -- not gonna look it up, but the anecdote is still illustrative).

That would have been an opportunity to gain 75% interest in one year!!!  And, I saw it!!  But, I didn't have the means to take advantage of it.

The same can happen with people with clever ideas without the means to bring the idea to reality themselves.  I'm not saying that's the way it ought to be.  That's just the way it is.  The law just does not pave a clear and easy path from clever idea to profit.  It just doesn't.

I've said this before and got blasted for it.  I'm prepared to be blasted again.  Lawyers don't make the law; they just help their clients navigate the law.  If you want the law to be different, you don't need a lawyer; you need a lobbyist.

Of course, that's not to say lawyers are entirely powerless.  Those who have read much of what I've written here know that I rail against many of the injustices I perceive in the practice as I see it.  But, there's not much I can do but push and hope my pushing has some tiny effect somewhere.  However, mostly, all my railing is much ado about nothing, a tale told by an idiot full of sound and fury and signifying nothing.

Regards.

[JimIvey]

Okay, let's say your idea is licensed.

The manufacturer has the thing made in China for $1 each.  They ship here for, oh I don't know, $1.25 -- $1 + 25c for shipping.  Your licensee sells to retailers for $1.75, and the retailers sell for $2.

Your $1million idea sells 500,000 units during the term of your patent.  Your licensee negotiated for the manufacture of the item, priced out all the parts, had an army of people specify all the details of the commercial product, paid up front for manufacture of the 500,000 units, promised at least this or that quantity available for each retailer for justifying a spot on the shelf, etc. 

The bottom line is that the conception of the idea alone is a very small part of the cost of bringing a product to market.  And, the licensee runs the risk that another patentee will come knocking on the door asking for more money.   

As I've noted in my invention FAQ, the only way an inventor is ever going to see the full value (and risk) is to make and sell the invention herself.

So, if you don't like the deal offered by manufacturers, become one yourself and jump into the marketplace.  If it's not that easy, maybe they have a good reason to keep some of the profits.

Regards.

[MYK]

Dude, if you're that sure of it all, why are you wasting our time whining about it?  Go do it all yourself.  Source your own contract manufacturing, put up the money, and pocket all the profit.

[DogDayPM 9er9er9er]

...I know that the tools will sell between the two more then a million the first couple of years than level off as more and more masnon will have bought atleast one.  ...

I'm curious where you get your sales volume numbers?  A quick search on Google shows about 180,000 masonry jobs in the US.  (No clue how many there might be in other countries.)  So your first 2 years sales will be lucky to be over about 40 thousand total.

But the simple fact is, if your invention is not patented in the US and in all those other countries, as soon as your manufacturer starts selling your inflated invention at $15 per, someone's going to get Chinese knock-offs and compete at $2 a tool (given you said it can be made for 1$).

[JimIvey]

Considering this is fool proof, and there are two tools I would hope to atleast get 10%  sale or profits still do not know which is best.

Well, profit = sales - costs.  Since costs will always be non-negative, sales will never be less than profits.

Although, using your numbers, there won't be much of a difference.  With a 1,500% mark-up, profits will be a full 15/16ths of sales, so it won't matter so much.

For example, let's assume that your "less than one dollar" is $0.75 (just a wild guess to illustrate).  Let's say it sells for $15 (just another wild guess from your numbers).  10% of sales would be $1.50 per unit.  10% of profits would be 10% of ($15 - $0.75) --> $1.425 per unit, though that's not accounting for other costs like advertising and distribution and such.

In other markets with lower profit margins, the difference is more significant.

Regards.

[DogDayPM 9er9er9er]

I am trying to convince myself, with out there being any real risk, I could bargain for more then the 2% average, considering there are two tools not just one.  Marketing for them is already in place.  Overhead of around 2 dollar per unit.  Mark-up at over 15 dollars.

I know the company, will be in a win, win postion, with this item.  It would seem that my knowing it, and they knowing it.  Would allow me room to negoiate, past the 2% barrier.

I am certainly going to ask for more then 2 %.

Oh heck yes, I don't think anyone's been telling you to start the bidding at 2%.  It might even be better for you to let them make the first suggestion as to rate, then you counter.  I think people here have just been warning you that you may end up around 2%.

But I still think you're foolish to proceed without getting the patent application filed first.  If you're serious about this, do what you have to do, beg or borrow the money from relatives, whatever.