A patent represents a bundle of rights that grants the patent holder a monopoly on the beneficial use of an invention. As a patent holder, you may grant someone else a license to use some or all of your rights. To license your patent rights, you must execute a patent license agreement. Patent license agreements must be drafted with care and should address all relevant issues.
Patent license compensation can take the form of a lump-sum advance payment, royalties based on a percentage of sales, or a combination of both. The better your licensee's marketing capabilities, the more lucrative royalty-based compensation is likely to be. The more you demand in up-front payment, the lower royalties your licensee is likely to be willing to offer you. The license agreement should specify exactly how royalties should be calculated. For example, the agreement should state whether royalties are based on before-tax or after-tax income.
You should identify the patented technology by patent number, so there can be no mistake about exactly what technology your licensee is permitted to use. You can grant two types of patent licenses: exclusive and non-exclusive. If you grant an exclusive license, you are not permitted to license the same technology to anyone else. By contrast, you can grant a non-exclusive license to as many parties as you desire. Although a licensee is likely to be willing to pay more for an exclusive license than a non-exclusive license, you may end up with lower royalties if your licensee proves unable to effectively market your invention.
It is unwise to grant your licensee a general worldwide license. You may, however, grant your licensee the right to manufacture and market your invention in any country that has granted patent protection to your invention, and perhaps even in any country where you have a patent application pending. On the other hand, you may want to specifically exclude certain countries with reputations for weak intellectual property protection. You may also wish to exclude countries where your licensee has weak marketing capabilities. Instead of including broad statements in the licensing agreement, list the name of each country or jurisdiction where your licensee is permitted to use your technology.
Normally, a licensee will expect you to grant a license that doesn't expire until the patent expires. This means the initial term of the patent – 20 years from the application filing date for a utility patent – plus any extensions. If you lack confidence in your licensee's ability to market your technology, you may offer a shorter term with an extension possible if your licensee meets sales benchmarks.