Posted by Bruce M. Tharp
| 7 Jan 2013
This is the third column in a series on product licensing from materious' Bruce Tharp.
So let's say that you have decided to pursue a licensing contract for your new product idea instead of trying to go into the production and distribution business yourself. You are OK with losing control of the final product outcome, and you are comfortable with the tradeoff of much-less-work for (potentially) much-less-compensation. I say "potentially" because even though going it alone affords a greater percentage of the profit, there is still the issue of "percentage of what?" If you choose the right licensing partner, their ability to sell product through their well-established distribution channels is likely much better than yours. A bigger share of smaller sales can be worse than a smaller share of much bigger sales.
But after the decision to license, the first question that I am almost always asked is, "What's to keep a company from stealing my idea after I show it to them?" Enter the confidentiality conundrum...
The Buddhist notion of the "beginner's mind" is a great way to approach the design of a product; similarly, the Licensor's Mind is also predicated upon an inherent humility. Three of its many tenets are:
- Your idea is not as unique as you might think
- Even if some aspect is particularly unique, profitability does not necessarily follow novelty
- The licensee has more to lose than you do
I know of many designers that are so worried about someone stealing their ideas that they do nothing with their ideas—they remain buried in their sketchbook (and by "buried," I mean dead). The licensor's mind is comfortable with risk, knowing that there is no reward without at least a modicum of risk. And generally the risk of disclosing your idea to a potential licensee should be far less daunting than risking hundreds, if not thousands of work-hours, and tens of thousands of dollars when going into business yourself.
Of course, willingness to risk does not imply naïveté. For the licensor, there are two fundamental tools of the trade that predicate the opening of the kimono: the Non-Disclosure Agreement (NDA) and the provisional patent application (PPA). In this article we will discuss the NDA, while the PPA will be discussed in a future column.
The NDA, or Confidentiality Agreement (CA), is a tried and true contract through which two parties agree to handle the secrecy of disclosed information. A simple web search will produce many examples, or you can download a few telling contracts from my own experience with actual companies here.
Posted by Bruce M. Tharp
| 11 Sep 2012
You may have to wait six months to a year to get on the shelves after a buyer agrees to sell your product
So let's talk money.
In the first article in this series about product licensing for industrial designers, I presented a vision of what is possible—positive, encouraging, optimistic but slightly cautionary. Here, I am interested in throwing out some numbers so that you can decide if licensing might make sense for you (or under what conditions it would).
It is important to understand that there is no "standard" contract across industries or even within a company. Everything is generally negotiable and there are many ways that compensation can pan out. The most common mode is for a company to compensate through royalties only, which helps mitigate their risk that the product may not sell well. It is also possible for the designer to receive up-front cash in addition to royalties, but often this is just an advance payment deducted from future royalties. But this is still good if you can get it, because there is no guarantee that there will be future royalties. Hence, companies usually only agree to advances if the amount is relatively small and/or if they are confident that the product will sell. Insisting on significant money up front is often a quick way to sour a deal.
OXO offers licensors both cash buyouts and royalty deals
Some companies prefer to buy the intellectual property outright in one lump sum—as with Ikea, for example. This is more of a gamble for the licensee, but saves the administrative hassle of calculating and cutting royalty checks, as well as the risk and cost of potential contract re-negotiation or disputes with the licensor (you). But with this risk comes the reward of saving all the royalties they would have paid out if the product proved particularly successful. Some companies like OXO consider both the royalty and cash-buyout options.
Companies can also offer an equity stake in the business that surrounds the product. This is much less common, however, and occurs usually when the designer brings more to the table than just a single new product idea (e.g. name cache, design services for a whole product line, expertise and connections, or even money). More established designers/consultancies do this, like Yves Behar's fuseproject that has had at least 18 equity partners including, more recently, with Core77 Design Awards 2012 Notable for Consumer Products, Sabi.
Fuseproject's recent joint venture, Sabi pill products
I am going to focus however on the most common approach—royalties-only. In doing so, I want to emphasize the need to understand the licensee's position. Being in the mass-manufacturing business is tough! There are high start-up costs with tooling and initial inventory, increasing pressures from mass retailers (like having to take back product if it does not sell!), overhead costs of product development and sales teams, stiff global competition, changing regulations, expensive and lengthy certifications, insurance, etc.
Posted by Bruce M. Tharp
| 29 Jun 2012
The designers at Orange22 landed a multi-million-dollar licensing deal for its Grid-It™ elastic storage technology, which is now in over 200 different products.
This is the first in a series of columns on product licensing for product designers.
Product Design students and recent graduates from across the country contact me for career advice. At some point, the conversation inevitably turns to entrepreneurialism. When I float the possibility of doing some product licensing, I have always gotten the same response: "What's that?"
After explaining that it's when you design a product, let someone else make and sell it, typically in exchange for royalties, I get: "Oh, yeah, of course." Then there is a pause followed by: "So...how do you do that?"
Despite design education's predicament of ever-expanding content areas within an already distended discipline, this seems to be a missed opportunity. But it's certainly not a new omission. I was never exposed to product licensing as a design student, nor had any other designer that I have known over the past 20 years. Design education has basically ignored it. In the Comments section below, I welcome readers' examples to the contrary (I do know of some recent guests/lectures at Art Center in Pasadena). And as a full-time educator for the last 7 years, I am also culpable; neither of the institutions where I have taught has dealt with the topic. That is until this fall when I will run a dedicated course on product licensing specifically for product designers at the University of Illinois at Chicago.
ABC's television show, Shark Tank, mostly follows the venture model. The Food Network's, Invention Hunters, follows the licensing model.
Usually during the last semester of the senior year, design students take a "professional practice" class to ready them for what lies beyond. These courses involve developing portfolios, visiting local design firms, and having design-related professionals come lecture. Sometimes design entrepreneurship is taught, but from the perspective of going into business yourself (venturing). Most design students and young professionals are not aware that there are two fundamental modes of entrepreneurial practice—venturing and licensing. Those who watch the television shows, Shark Tank or Invention Hunters may have a leg up, as the bleak economy has sparked the popular imagination.
The tragedy of education's licensing lacuna is that the business world has entered an era of "open innovation." Over the last decade, companies have realized that they do not have a monopoly on the best ideas, and/or that it is really expensive to keep research and development teams in house. Overcoming their hubris, laziness, ignorance or risk-aversion, manufacturers/distributors are increasingly welcoming new product ideas from individuals outside of their corporate walls. For example, since 2008 over half of Procter & Gamble's new product offerings have come from outside the company. A powerful, new opportunity awaits independent product designers.
You may be thinking, "This is nothing new. Designers have been getting royalties from companies since the mid-20th century!" Certainly this is true, but there are some key distinctions. Early on, designers often received royalties in addition to work-for-hire design fees. As such, they were really consultants, and the royalty was a way of sharing the risk between designer and manufacturer especially when the start-up costs were high. Also, these designers were of some repute and the companies went looking for them.
Another common method, still today, is for less-well-known designers, to pitch their capabilities to a company in hopes of receiving a project brief. If successful, they are tasked with designing products that the company is already looking to produce—not necessarily a new idea or direction from the designer. And increasingly these briefs are done on speculation (no fee, just royalties if the idea makes it to market) because of an increasing supply of capable designers. So, yes, royalties have long been a means of recompense, but open innovation makes this more accessible because you do not have to have a big design name—or even a portfolio. And you don't need to try and schmooze your way to a brief (but it still is fun to go to Milan Design Week anyway).
Based on his award-winning Endo magnets, Scott Amron licensed his idea to OXO
Posted by Bruce M. Tharp
| 9 Jul 2008
Get your deciept on! The Chicago Chapter of the Industrial Designers Society of America (IDSA), in collaboration with the Chicago Furniture Designers Association (CFDA), invites you to submit an original work of design for an exhibition titled, Deceptive Design: Experiments in Furniture. The selected pieces will be exhibited at the Chicago Cultural Center from October 2008 through January 2009. This is a really interesting exhibition theme--check out the details at the official website.
Posted by Bruce M. Tharp
| 28 May 2007
Last week Don Norman organized a meeting of the design minds in Chicago with the aid of the newly founded Segal Design Institute (endowed by Crate & Barrel founders, Gordon and Carole Segal). Educational representatives from Northwestern U., The School of the Art Institute of Chicago, U. of Illinois-Chicago, and the Illinois Institute of Chicago joined up with industry envoys from IDEO, Herbst Lazar Bell (HLB), and Skidmore Owings & Merrill (SOM). The event offered an opportunity to learn more about each other as key Chicago design institutions with discussions centered upon fruitful collaborative opportunities. Stay tuned for future design events and leadership from the windy city.