Common Sense Inventing - Educational articles to help Inventors make informed decisions

There isn’t a week that goes by that I don’t have several Inventors contact either asking if I would like to invest in their idea or can I direct them to someone that would invest. The thing that troubles me is the lack of understanding of what they are asking and what it will require. I have listed some questions and information below that you need to consider before asking for an investment. Can you tell me any other questions you would ask or information you would want if you were the investor?

1. Not knowing how much they realistically need in the form of an investment to get their product from idea to the store.

2. Not knowing the value of their product so they can break the investment down into percentages. The Investor will need to know what percentage of the product/company they will own for their investment. Example: Does a $50,000 investment get them 10% of the company?

3. Not having a business plan detailing how they plan on spending the money once they have the investment.

4. What ROI (return on investment) the investor can expect and how soon after the investment can they expect to see a return?

5. Will you need more than one round of investment money?

6. Do you have a distribution network for your product?

7. Do you already have other Investors?

8. Do you have a working model?

9. What protection do you have for the idea, if any?

10. Who are your competitors?

11. Do you know the regulations for taking an investor’s money for your state? (some states have limits on what can be invested and the person investing has to have x amount of worth before it is allowed)

12. Do you know how to administrate the shares certificates?

13. Will you be an LLC or Corporation?

14. Who will be on your board and what responsibilities will they have?

15. Do you have an exit strategy and what is it?

16. Are you selling strictly online, brick and mortar, combination of both?

17. Will your product sell local, regional, seasonal, national?

18. Are you compliant with the laws and regulations of your state for taking investments from outside parties?

19. If you are licensing it what is the lowest percentage you will accept?

20. Will you be asking for an advance and how large of an advance?

21. Will investors be reimbursed based using the net or gross income?

22. Will payment to investors be monthly, quarterly, annually?

23. Does the Investor add value other than just their money? Do they have contacts that could increase your companies value, get you more business, expand your distribution, lower your manufacturing costs, etc?

24. How has your companies money been spent up to this point? Are you frugal with your money or make poor choices wasting money? Investors want to see you use their money wisely and not spend it on items that do not add to the value of the process.

Another point about investors that Inventors need to consider is the fact that once they invest their money a number of them take a hands on approach to the company they invest in and want a say in the how their money is used to protect their investment. And your vision and theirs may not be in sync which can cause conflict in the business. So you need to have a clear understanding between you and the investor what their role is and your and their expectations before you take any money.
Have seen an Investor show up to the business and direct employees to do other tasks than the boss had assigned them. The employees were confused on what to do because they knew the person invested a large amount to the business and did not want to make them mad. The Owner of the business had a habit of leaving others in charge as he went out foolishly wining and dining his friends trying to impress them on the Investors money. The Investor ended up pulling out of the investment demanding all his money back. The owner ended up having to liquidate a majority of the company assets to refund the Investor. He tried for three months to get other Investors interested in his company but the original Investor made a point of letting other Investors in his circle of friends that the business was a bad investment. The business went bust a couple months later due to lack of funds.

When many Inventors think about licensing their idea/invention they think of Exclusive and non-exclusive as the only options. What may be overlooked is the way these can be used to your advantage. Example, if I licensed my idea to a toy company and they wanted an exclusive contract it can say that I am exclusive to the toy industry but open to any non toy markets. So I can go to the pet industry and get an exclusive deal there and not violate the contract with the toy company.

This can work well in your royalty percentages because most companies want an exclusive deal for their industry to keep their competition at bay and will give a better royalty percentage for that deal. And this allows you to seek other markets that do not affect the company you already have a deal with. Now you can still go after multiple non-exclusive deals in a particular industry but the percentage is normally lower because they know they will possibly have competition. Going the non-exclusive route can also have its pitfalls.

Lets say you go to SpinMaster toys and get a non-exclusive deal for 3% royalty.But had it been an exclusive license they would have paid you 5% royalty. And now you approach Lego with the same non-exclusive deal and they have interest. You have to disclose to them you already have a non-exclusive deal with SpinMaster Toys. This information may cause Lego to pass on the deal because they know they already have competition in the market and SpinMaster already has a leg up getting to market since they are already in the process of making the toy. So does Lego take a chance they can still grab a large portion of the market or do they pass because of the competition?

This will be the challenge for every company you approach after getting the first deal.

If you sign a exclusive deal with a company that states they are the only licensee, you can not go after any other industry even if the other industry is not in their competition area.

If you have a technology that can jump to other markets make sure you indicate this once you have interest from a company. You do this for a couple of reasons. One to let them know you will be pursuing markets outside their area and it needs to reflect this in the contract and it also lets them consider it for other markets they may be in you are not aware.

There are many companies known to consumers for being in one market, but are also in a diverse multiple of markets. So, by doing your research and knowing the other markets they are in you can tailor your pitch to show how they can possibly get multiple market sales off of one product idea and grab a larger market share before the competition. And you can be prepared to negotiate the type of deal that works best for you and your idea/product.
Here is a good example. Look at the Newell company. Were you aware they are in all of these markets? http://www.newellbrands.com/OurBrands/Pages/our-Brands.aspx

I don’t know any Inventor that has submitted an idea for review by a company that has not gotten a rejection. The question is how do you react to that rejection? Below are things that Inventors have done when they received the dreaded rejection. Do you see yourself or any of your fellow Inventors falling into these traps?
Rejection is part of the business. No matter how good your ideas are you WILL see rejection. Learn from it and make informed decisions. Don’t let anger ruin what could be turned into success with more research or going in a different direction.

Are these things you might do?

Do you rant and rave to yourself at home or to anyone that will listen about how stupid the company is for turning you down?

Do you send a nasty email to the company telling them they will be sorry for turning down your million-dollar idea? Because you will now sell it to their competitor and destroy their company.

Do you teach the company a good lesson for turning you down by not submitting anything else to those stupid people?

Do you toss your idea in the trash and just forget about it ever again?

Do you wish the company was closer so you could go there and give them a piece of your mind?

Do you call and email the company daily telling them they need to reconsider your idea because they are passing up the opportunity of a lifetime?

Do you send them even more information on the rejected idea to try and change their mind?

Do you look for someone else to blame for them not “Getting” your idea?

Do you tell the company you are going to tell all your friends not to buy any of their products since they were stupid enough to pass on your idea?

Do you now hate anyone that has succeeded in getting their product to market and you have not?

Do you get friends to write the company and tell them they would buy your product if the company made it?

Do you toss away all your other ideas because no company is going to be smart enough to see your genius?

Do you decide you will show them and pay a company to make your product for you when you have no idea where to go next?

Now, these next two have to be the top winners for what not to do when you get rejected by a company. I was speaking to a couple of Inventors this weekend and was surprised when one of the Inventors told me her plan to get back at a company that rejected her idea. She said she had sent her product to a company that was a perfect fit since they do most of their products in plastic and hers was a plastic product. She was devastated when they said it was a decent idea but just wasn’t what they were looking for and with a limited R&D budget to work with they were going to pass.

Her reaction was that the company was worth millions, had enough of a budget to cover her product, they said it was a decent idea and was just turning her down because she is female. She wants to file a discrimination lawsuit against them. I tried explaining that a company no matter what they are worth generally has a budget they work within for R&D and the people running that budget are looking for the most bang for their buck. If they thought her idea was decent but not great and saw it as high risk on getting a return on investment I understand and agree they should not go forward with it. It has nothing to do with gender, it is a financial decision. She said I sounded just like the lawyer she talked to and stormed off. Glad I am not working with her. LOL

This is another example of why many companies are reluctant to work with outside Inventors.
Here is the second winner. Talked with an Inventor last week that wanted to take out an ad in their local paper blasting the company that rejected their idea. When I asked if they thought that would help or change the company’s mind about their idea she said “No, but I am so frustrated I don’t know what else to do.” After talking for a few minutes, she decided that was probably not in her best interest.

Are any of the above items options you think would help you or build a better relationship between you and the company that rejected your idea? I have gotten rejected by plenty of companies and I don’t like it any better than the next person but I have also licensed products to those very same companies that rejected my other ideas. You must be willing to take criticism, rejection, learn from it and improve your ideas if you plan to succeed.

Here is a perfect example of what I am referring to when I ask “Are You Giving Away Your Invention Ideas By Your Actions?” Inventors don’t READ what they sign up for and then later complain when it goes bad or they get rejected. Let me say up front I have no issue with the company used in this discussion. I am just using this as an example to prove a point.

Take a look at this statement you see before you even start to do anything with the company.

“FOR INVENTORS
HAVE AN IDEA FOR THE NEXT GREAT TOOL?
We’re always redesigning and reimagining our tools, and we love it when customers tell us they have ideas about enhancements and additions to the X company. But there are important things you should know before you submit your idea.
Most importantly, we cannot consider your idea until you have FILED A PATENT TO PROTECT IT.
Once you have filed a patent application, you can use the following link to submit your idea. We’ll begin a review that can last approximately 90 days.”

Did you notice the part that says “Most importantly, we cannot consider your idea until you have FILED A PATENT TO PROTECT IT.”

My contact at the X company has said that about 60% of those that apply HAVE NOT filed a PPA or patent as required.

Now, once you go past this page you have another statement that says

“Before submitting you must agree to the following terms and conditions:”
and
“I confirm I have read, understood and accept the terms & conditions for submitting my invention.”

As we know a large majority don’t read this and just click the box and click NEXT.

Take a look at what you are agreeing to for those that did not READ it. Do you see any issues that will come up for those that did not file a PPA or patent as it stated?

“By using this invention submission form and website, you (“you”) agree to be bound by the terms of The X Company Non-Disclosure Agreement (“Agreement”) listed below. Before you may submit any invention information, you must read and accept this Agreement. Agreement is effective upon acceptance for new users and terms and conditions may be updated from time to time without notice to user.
You hereby acknowledge:
The X Company (“Company”) has found certain precautions necessary in accepting disclosures submitted to it. Its employees have many ideas of their own for the improvement of the X Company’s products and the development of new products, some of which may be similar to your own. To prevent any misunderstanding as to what the rights and obligations of the inventor and the X Company are, the X Company’s policies as to considering inventions are set forth below.
The X Company cannot agree to hold your disclosure in confidence because it must disclose the invention to various employees and sometimes even to those outside of its employ, to determine its value to the company, and because agreements to hold in confidence have been found to entail other obligations not intended by either the submitter or the X Company. It is understood, therefore that no confidential relationship or agreement to compensate is entered into by reason of the fact that the X Company is considering your disclosure.
A full written disclosure, preferably the patent application drawing and specifications, or if there are none, a sketch or drawing (which can be a rough one, provided it illustrates the invention so one skilled in the art can understand it), must be furnished to the X Company, so that the X Company can tell or not whether it will be interested in your invention.
The X Company is not under any obligation to reveal to you information of its own in the general or specified field to which the disclosure relates.

The X Company wishes you to be satisfied that your interests are fully safeguarded. If an application for a U.S. Patent has not been filed, you should have the copy of your drawings that you retain signed, dated and witnessed.
Any disclosure to the X Company is made on the understanding that the X Company assumes no obligation to do more than consider the disclosure so far as in its judgment the disclosure merits and to indicate whether or not the Company is interested. It is understood that you rely only in your rights under the patent laws.
The X Company receives no rights hereby, or as a result of considering this disclosure, under any patent rights you now have or may acquire to the subject matter of the disclosure.
The foregoing applies to any additional or supplemental disclosure relating to the same subject matter.”

Now the question is did you find anything in that agreement you would have a problem with if you did not file a PPA or patent? And once you fill out all the info required and submit it who is at fault if they use the information?

Inventors, do the boring work and READ what you sign.

http://www.rogerbrown.net

Had a discussion last week with an Inventor that has had a string of rejections from company Y even though based on the ideas he has shown me you would think they would have shown interest. His presentation is short and concise. He has great graphics that show his ideas and possible packaging aspects for all of them and even has short demo videos of each product showing them proving proof of concept. He even has some good gap analysis slides. The ideas answer the “Better Than” question.

Everything looks as prepared as you can get, so what is the problem? I was as confused as he was until he showed me a listing of the companies he had previously sent the material to for review. He had disclosed at a different meeting we had that he had a deal with company X and had signed a memorandum of understanding outlining what both sides had agreed to but changed his mind at the last minute and decided to pull the product from the company. They had spent a significant amount of money testing and doing a focus group study on his product. So they were not happy with this decision. I know the person he was dealing with at company X from my dealings with company X.

What the Inventor did not know is shortly after this issue happened with him the person he was dealing with at company X left company X and is now working at company Y doing the same position. So how do you think his ideas went over with this same person he burned at company X?

As in any industry people get promoted, fired, quit, move to other similar markets looking for work. So, the bridge you burn at one company can follow you through a number of companies. So it does not take long for your name to be bounced around until you are known as trouble. The same goes if you have a solid reputation for getting things done, providing good ideas and having realistic expectations. Word gets around in this industry. What will they think about you when your name comes up?