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July 28, 2023
John Rizvi, Esq.

Product Developer Sef Chang Share His Knowledge of Licensing Products & Receiving Royalties

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00:01

Okay, we're alive. Seth, how are you? Good to see you on this Friday.

00:06
Good to see you too.

00:07
And let me see, I think we're having there it is the participants are rolling in. We have close to 150 people registered today. So there's a lot of excitement. Licensing is not something a lot of people talk about. So it's, it's exciting to to hear from someone that's an expert in the field. Let's give everyone another 30 seconds or so to to come in and then we'll start the How are things with you? You're on the West Coast?

00:37
Yes, I am in Los Angeles.

00:41
Los Angeles, how is your city's dealing with this pandemic?

00:46
It's it's, yeah, there's a lot, a lot to say a lot to talk about how we're treating, you know how people are doing it, treating this whole thing right now. But I think that'll be a whole nother episode. itself, it's actually not too much different for what I normally do. I have been working from home for I don't even know how long way before the pandemic. And this is something that I feel like in a way I was kind of trained for, to be able to be comfortable in close quarters for a significant amount of time, and keep my sanity. So there are things that I've done and do that help, you know, keep my head on my shoulders.

01:35
Rotate. And this is a time when we all we all need it. I'm going to be doing one of the episodes that I've had before on Ask the patent professor is inventing in the midst of a pandemic. And I don't want to get into that now. Because we only have a half hour with you. Guys, let's, let's have a warm welcome for Seth. He's an amazing licensing expert. I'm gonna let Seth introduce himself because I can not possibly do justice to his background and experience with licensing new products that take it away.

02:07
Yep, absolutely. Thanks for having me, John. I am a product developer, I develop my own product ideas, and I licensed them out to companies. And I have a non traditional approach to product development and launching new products. And we could go a little bit into that. And, in addition, I thought, hey, there's a lot of inventors and product developers that are also wanting to launch their own product ideas, but they're always told to go one certain path, which it sounds like it's the only path for most folks. But good good news for you guys that there is another path available. And that's licensing. And because there weren't that many resources and educational materials, I can only name a handful, right? Just just only on one hand probably. Which is, it's nice to know that there aren't that many people talking about it. But at the same time, it should be such a big thing, that people should be talking about it and learning about it and applying it to their own projects and products that you are creating. So from that I decided to create a little YouTube channel called House of royalties. And that's where I document my experiences of my licensing journey, in addition, share and teach other folks how to do licensing or how I approach licensing. And we do something similar like this, where we do live q&a, we'll just go and have people ask questions. And we're just answering questions and doing some work as we as we're chatting. So that's if you guys want to be interested, you know, and checking out how I approach it, do a little shameless plug here about the house of royalties YouTube channel. But that's where I will go and just kind of share what's been going on in a day that day in the life almost of a product developer. And hopefully, there are some learning moments that you guys will be able to take away without learning the hard way.

04:09
Perfect, you've learned through the school of hard knocks, what not to do. And both of us I mean, as a patent attorney, I deal with the contract the actual licensing agreements, and making sure that inventors are not ripped off. And that aspect, but as far as getting companies interested in the product, and sell sheets and all of that, that's outside my expertise. And there's like, you know, very few people that have expertise in that. But before we dive into a few questions that have prepared, I think the let's start first with just definitions. I mean, I'm asked to, you know, a lot like what is a license? What is a licensing agreement? It's not, you know, in a in a legal sense, a license means permission. So when you have, say a driver's license, you have permission to drive but a license for a product is generally is an inventor giving somebody else permission to use or sell their product. But is there Do you have a certain way that you kind of get that concept across, to

05:16
back into layman's terms, licensing is renting. And the metaphor that I love to use, that's probably easy to understand for most folks, is real estate property. Okay. So if you go and buy a piece of real estate, you have the deed, you have your name on the deed, it says it's yours, you own it, you could do whatever you want with it. And if you want to make some additional income to help pay for mortgage, and some you could go and rent it out, right? So you have a tenant that agrees will pay month, monthly rent every single month for us to live here. And if you don't pay, you don't get to live there anymore. All right, you get, you have to leave, we're gonna have to find somebody else. That's exactly what you're doing with licensing

06:04
licensed me real quick. I know we have our panelists, Jenny, can you grab? I know there's a couple of patents on one of the desks in the office, can you grab one and bring it into my office? I just want to show our viewers that a patent is the intellectual property equivalent of a deed. So So yeah, so

06:22
So let me finish here, John. The that's exactly what it is. It's a intellectual property is, is that it's very similar to real estate property. Except, in my mind, right there. Yeah. John, you want to share that? Yeah, yeah, that is a deed to an idea. If you had your name on it, it says you own it. In my mind, I think it's just a very glorified receipt, that's from the USPTO, boom, all right. All right. And that says, you own the idea. And you could do whatever you want with it. So you're taking that exact concept, instead of it being a tenant, this tenant is a full on company, they are the ones renting it, they are the ones that are in your house. And if they don't pay rent every single quarter, AKA your royalties, they don't get to live there anymore, that you they do not a you're not giving them permission to make and sell that product and make profit off of it anymore. So you go and take that back, take them out. And then you find a different tenant. So the best example or metaphor I could give is renting just like real estate property.

07:30
Yeah, I love that. And going back to the whole renting, if you get tired of having tenants and renting when it comes to real estate, you could just sell your property outright. And you can do that with with a patent as well, you can rent it, which means they don't own it forever, they own it for a short amount of time. Or you just say you know what? I don't want to deal with collecting rents every quarter every month, whatever. I just want you to own this intellectual property and sell it today.

07:59
Yeah, and it's, it's, it's whatever you want to do with it. Because it's yours, you own it, if you want to rent it, you can, you could sell it, you can. But sometimes you don't know how valuable the land is until you really dig in and see what's in the ground, right? Sometimes you're like, oh, this, this plot of land, just nothing but field, I'm just going to sell it for $100,000 or whatever dollar per square foot because I just want to get rid of it. Some company comes in or they realize, holy crap, there's a bunch of oil in here. And then they realize is millions and millions dollar worth of oil. Maybe. Maybe the decision that you should have done was keep it and then you rent it out. It's like whatever you want to do with it. It's your choice. Right,

08:44
perfect. So I want to dive into one area of curiosity that I know, Steph, you're humble. So you don't you don't mention this on your own. So unless I bring it up, you've licensed a product with over 180,000 units sold. Which for an individual inventor that I mean that's a that's like hitting it out of the park. Tell us a little bit about about that. And this you know, my dad I might even be old so I don't know. What are the sales are today?

09:11
Yeah, that's I actually have a right here. This is my it's actually my first licensed product. Oh, yeah.

09:17
Hold it right up to your camera

09:19
is nothing special. It's just a miniature back scratcher. Boom, that's all it does. So this is company novelty company called Kikkerland. And this was right after I graduated college and discovered licensing. I was like, I'm going to see if it's, you know, worth pursuing. And I started just submitting ideas to this company called kicker, like right at the bottom of the page, submit a product or submit an idea. I think that's what it says. So I've just sent ideas, and they've made regular size collapsible back scratchers. And I just thought, hey, it'd be kind of interesting if you just made a smaller version of it.

09:56
So is it a is it a keychain also is that

09:59
yeah, I'm teaching so you can put it on your keychain. So you have something that always has your back. Out of all the ideas that I've sent them. They were, they pick this one, and they were saying, we love it, let's go for it. So they have been selling it still to this day, all around the world. And every quarter, they just send me the royalty reports and the royalty check gets direct deposit. Last I've heard and this was a few weeks back that they just they're negotiating with a big box retail store. And they were saying because it's gonna be a little bit of a larger unit or a significantly larger unit. This in this one, it's gonna be a smaller royalty percentage. Are you okay with that? And in my mind, I'm like, yeah, absolutely. Go for it. Thank you. And you're welcome at the same time, because they're also making money off of it, too. And that's the, that's when I realized, like, yeah, this licensing is a real deal. And there are companies that are looking for new ideas constantly. And also right now, in this specific day and age in the middle of 2020, these companies could really help use some help from independent practice helpers, and independent and inventors.

11:13
So in what, you know, one phenomenon, I think that has been occurring over the last 1520 years, I've been practicing for 25 years. And a lot of companies are downsizing their r&d departments, and not having product developers on salary. They used to have his W two employees whose job it was to come up with new ideas. And when an idea came from the outside, there was always an obstacle to an inventor, because if a company takes on an idea from the outside, from an independent inventor, the product development team just looks terrible at the company, because they're the board of directors is like, Oh, what are we paying? You guys owe the salary for if we end up having to pay royalties to outside and vendors anyway. So I think a lot of companies have just completely gutted their internal r&d, and are soliciting ideas from the outside. So you found over the course of the years that you've been licensing, you have identified companies that encourage innovation in submittal of ideas.

12:22
Yeah, well, let's, let's go and talk about the first point that you just just mentioned about how more and more companies are downsizing the r&d. They're downsizing more than r&d now. They're downsizing every single department of their companies at this moment possibly even considering moving out of their place of office, you know, office space, because the paper ramp and nobody's using it. It's a very interesting time for companies. And it's a scary time, and there is a need for them to continue continually sell products in order for them to stay afloat. And one strategy that's worked well, that's constantly work is validated is to launch new strategies, or new products every single year. iPhone till this day are still coming out with new iPhones. I don't even know what number iPhones had. I'm more than 10. Now, I don't know Samsung Galaxy, I don't know, Honda 720 21. They're already thinking about that. It's probably already out.

13:23
All right, Apple has just as one example on the iPhone, they have 49 plus patents, just covering different aspects of it. So you're right. That

13:33
yeah, the innovation just keeps on growing. There's always a next generation of these products, but then these companies are doing it with half or less than half the department size. Especially right now where when they're laying people off or furloughing people, and yeah, they are hiring a lot more contractors. Technically, when we are doing licensing deals on our tax returns, we do a 1099 Because we're contractor so that is going to be a lot more common especially for these companies that do want to stay afloat but also recognize that they need to come up with a new product every single year. And they can't do that every you know, kid get banger product products from the internal team. They're already overworked as it is. So let's just go and open up the doors have the rest of the world pitch in. All right. And then we'll go and take it from here you pass the baton will run. So

14:25
and sometimes it's even their own customers like there they realize their customers are for the products. So when I say

14:33
go it's a great example of that.

14:37
That's a great example. Lego, okay, yep,

14:40
yeah, there they have this whole they have their own version of submitting new products and people actually vote and there's like if you want to do friends, the coffee table seat, you know, coffee, the couch and all that you could do that. You know, submit that ID and Pete enough people vote for it. I think it actually gets produced he gets some credit Do you possibly get paid, I'm not entirely sure on that I haven't read it all the way through. But there is a submission for Lagos to come up with a new Lego theme. Under Armour has a specific website where you could submit your product right then and there. And they'll tell you how to, you know, what they're looking for and how to do it. And they'll reach out or, you know, they'll reach back. If you're in the dog or pet industry, Kang, K, O N G, that rubber dog toy that's supposed to stimulate the dog, but also be indestructible. They accept outside ideas, and there's a whole submission form.

15:38
Okay, so well, so that's so that's those are several companies just in some of them, like huge multinational corporations. So it's not just, these are companies that if they wanted to develop products in house, they certainly could afford the r&d departments, but they're now going to outside ideas. Because frankly, it's faster, it's less expensive, and sometimes their own consumers are the ones in the best position to help decide, you know, they know what they want. So have you worked with any of these companies? Have you worked with any of them or

16:16
now with those, I know, there are people that have worked with them. Specifically for me, I've I started in the novelty. So Kikkerland was one of my first companies I liked. There is a company that I have, I have sent a lot of ideas to, but haven't liked anything with them yet. It's called Fred and friends, and they are owned by lifetime brands. So that's the parent company. And there, and then I started moving into the sports merchandising world. And I was able to get a sports merchant merchandise product licensed, and then everything kind of hit the fan. You know, things didn't work out as planned with everything that's happening right now and all that. So we'll see that was kind of on pause. But technically, it's a license deal. And a third one, it's actually not so much of it's not so much of a product, it's more of a design project I'm not gonna be able to talk about right now. But it's licensing I want people to understand is a business model. It's not just for products is not just for inventions, it's for intellectual property. And intellectual property comes in all forms, but the simplest way I can explain it is ideas, okay? And any art, music, poetry, photo, video, even branding, brands, characters, those are all forms of intellectual property that can be licensed. Now, if you understand the game and know how to use it, especially if you're a creator, and come up with a lot of ideas and make things it's designed for us. It's just we weren't taught that. And I went to an art school and they didn't teach me anything about the business and creative side or the art side. So I had to go and learn myself, I went through my own master's program by throwing myself into the fire, and came out are all right, this this thing, it really works in favor for creators and inventors and innovators.

18:12
Okay, is there as far as if someone's looking just for a rule of thumb for a licensing royalty percentage? Is there? Is there such a thing that like an industry standard? Or does it really vary? So much that you can't be can't put a percentage on it?

18:30
Yeah, it's hard to tell. But if I did give like a generic range, it could be from 2%, maybe even lower. I can't even move from 1% to even five. That's like, those are good. Like, there are some people that has, they've gotten 1415 20. It's like, it's kind of a high percentage, but then you kind of have to do the math. And even the companies themselves don't really know. All right. So when when I approach companies, I'm not demanding them for royalty percentage, I don't ask them. No, I don't tell them I am looking for this much percentage. I actually want them to know, like, our first Are you interested in if they're interested, they're gonna do their homework, they're gonna contact manufacturers get quotes, and they're gonna crunch the numbers, see how much profit that they're gonna make? And then from that profit, there'll be able to calculate what percentage would make sense. That's a win win. So all of that, I let them figure out then I decide I'm like, Okay, now, since you've crunched the numbers for me, let's go and look at how much this thing cost. Okay, give me a rundown. And then we'll, we'll move the needle back and forth until we feel like something's comfortable. And if it's a low percentage, then we're going to go negotiate for something else. That will make it more valuable to compensate for the lack of percentage that I'm getting. So it's a game that you're playing, but for average industry, like it's kind of it's really hard to say all interface.

20:00
And what I found in my experience, there's some factors is how, how close to a final product and packaging you provide. Because if if all you're providing is the general concept, the idea, then that's one thing, the company still has to invest a lot to get it shelf ready. Whereas if you've done all that homework, then that increases the percentage. In your experience, our company is looking for exclusive licenses for the most part, like they don't want you. If you sell exclusive rights to them, they don't want you going to their competitors, and also licensing their competitors.

20:38
Yeah, so this, this answer is going to be it's also going to, you know, relate to what the point that you just made about having all that stuff, doing your due diligence to make it a more valuable thing. You know, it's all really in the negotiation, if you are a business, and you have every power of what you want to do with your business and your product, and if you do not want an exclusive deal, but they're asking for an exclusive and you recognize that this company does a good job on this side of the market. And I know this other company does a really good job on this side of the market. And I know for sure that I want it to be a non exclusive, and they're asking for exclusive, like, Alright, then I'm walking away, you should be completely okay to do that. And if they're telling you a wall, because you don't have this, and you didn't have this patent, or you didn't have this, you know, you didn't tell me this may sale. So we're gonna give you normally we give, you know, people this percentage, but we're gonna give you this because you don't do this. I'm like, okay, that's fine. I'm walking away. Or we're negotiating. So it's not it's like, yeah, those are those are good ammunition to have, but your true, the true powers to decision of whether you what you want to do with your idea. And that might be a really good business decision to walk away from that, you're not going to be strong arm by a different company. No, you're actually kind of on the you're doing them a favor, you're walking up to a company and you're presenting an idea, that's going to help them make money.

22:05
Okay, they didn't have to pay anything for like, they're not paying for all the and the products that don't make it. Whereas if they hired somebody on salary, to come up with products, there'll be tons of time wasted in and money wasted in products that don't make it so this way they get to pick and choose. And do so pretty much

22:27
you get to pick and choose to. That's the thing. It's I think I want to start changing conversations about how inventors are being looked at. It's not about the the company, it's like, No, you're a company to one of my favorite favorite Jay Z quotes. Okay? I'm not a businessman. I'm a business, man. All right, you're a business talking to a business. I want to start changing people's and ventures, I think I think there's a lot just in the change, simple change in linguistics and the words that we choose. You know, I want to make you the inventors. Now, this is to be big, because we are actually playing a big part in this role society, I have a very strong feeling about how we're going to be playing in this next form of economy. And this whole model of licensing is based off a thing called open innovation. And open innovation has a lot of benefits to what there are some economic professors or think that they're talking about as the third industrial revolution.

23:30
But what I often say that's a third. The third is

23:34
just a little spoiler. It's about sharing, sharing economy Great.

23:38
Well, we're in what I call the golden age for inventors. Because there was a time when the companies had the upper hand, like if an individual inventor wanted to bring the product to market, you didn't have the option of creating an eBay store or going and selling directly on Amazon, there was no internet there. You basically were at the mercy of these companies. That's no longer the case. And that's created a lot of power for inventors themselves. I do know I have we have a strict cut off and a half hour because I think these days everyone is zoomed out. We have two questions submitted in advance. So I'm going to we're going to start with those. And then we have several questions in q&a here. So we're gonna go with those next. But the first one, what three components are mandatory in the licenses that you negotiate?

24:29
And negotiation? Well, it's a timeline, like how many years? Is it three five, do you want 10? Usually three or five is normal. I asked for redo talk about the exclusive exclusivity or non exclusivity. That's a very important thing. And the thing that I really like to add in is the improvement so anything that any modifications, adaptations, any changes that they make, even for the next generation of products that until Electro property so it belongs to me.

25:02
Okay, go perfect. Another question comes from clay. And you may have touched on it. But when licensing your product, how can you determine how much to license it for? And how much to accept for royalties?

25:15
Yeah, you let the company decide. And if you're talking with multiple companies, you let them be they all determine they try to figure out what the numbers are, then you pick and choose.

25:27
Okay. Another question by Bob, do you use a pitch deck? When reaching out to prospective licensees?

25:34
No, I use a thing called a sell sheet. Think of it as a print ad, I just email it to them, I tried to be very short and concise with how I pitch that way. Think about the person receiving these emails to receiving hundreds of 1000s of emails with pitch decks with full on long essays, they're not going to read that they don't have time for that. And you're probably going to be they're already burnt out from it. So they're gonna say no, too much. Just make

26:00
sure. When you say and I just want to clarify, when you say a sell sheet, it's basically like a resume for your product. It's, they say a resume should not be two pages, unless, you know, there's the

26:13
resume still a little bit too much information. It's printed. Your

26:19
bet it's one sheet of paper, one sheet be

26:23
printed magazine, ease, it's a lot easier metaphor to think of, and it's more direct. It's exactly like a printer, except the person that's looking at is not a potential customer is a potential licensee. That's thinking about the potential customer.

26:38
Okay, no, perfect. It's clarifies and also that I think the resume also implies a lot of text. Whereas what I'm getting from what you're saying, well, print ad and plasma,

26:49
three experiences is like me, me, me, me, me. Not resume, it's not a resume.

26:55
Perfect. Don has a question, how important is the naming of a product? Or is that something that company you sell it to will take care of?

27:03
Yeah, it's not that important. The company that you're you're licensing it to not selling, if you're going to license great, if you want to sell it to you could sell it, those are different.

27:13
But once you sell it like that, you don't have naming rights to it anymore. It's just like you sell you know, that they own it, they can call it whatever,

27:21
it's their intellectual property, they own it, the most valuable thing is ownership. Okay? The if they take it, they run with it, they cap a name that's on brand with their for their audience. Now, when I approach naming my products, I like to be as literal as possible. Like not, don't don't make it anything too whimsical, where they're like, What and get confused after they're like, oh, okay, I get it, and then they understand what the product is.

27:46
So yeah, so that's what you're suggesting is that the name? You know, unless you're a huge company that has the marketing power, to explain what the name stands for, you know, Google can get away with, you know, developing a phone and calling it an Android or whatever, but the average inventor, it needs the name has to be looking for something that kind of takes what it is, like, look at me, like posted. It kind of explains what it is. Now your miniature keychain. backscratcher just out of curiosity, what's it You didn't supply a name for it?

28:24
I just call it mini backscratcher.

28:26
Okay, do they have a brand that they're selling it as a brand name?

28:29
And they call it? Kikkerland? Mini backscratcher?

28:34
Okay, wait, no, perfect. There you go. Like something simple, nothing that explains what it does.

28:41
People get too hung up like, oh, they trademark their name. So they could license their or sell the name to have like, the chances that amusing that name is going to be highly unlikely. And most likely the name that you gave it is terrible.

28:55
So plus, they have again, they have the MBAs and the marketing staff on on board that they can they can spend this time and

29:03
they've been doing it for a long time. They they know what they're doing. Let them do it for you. Right on you take a kid you take care of it for me. They're like Steve got to come up with the iPod. Yeah, go make it happen. Think it's gonna be like go.

29:17
Exactly. So. Okay. We have tons and tons of questions that are patent and trademark. They're more legal questions. So for our viewers out there. What I'm going to do, I'm going to address these in the inventors mastermind, which is a private Facebook group that I have. And Jenny, if you can post up the link to that in the chat box. So any of the legal questions that have we haven't addressed because today's really for Seth and licensing, so go to the inventors mastermind. Any questions there were some submitted in advance that were legal questions. So I'm going to give me a couple of days and I'll respond to every one of those by email. But in the meantime, we're out of time but Seth if the Viewers want to reach out to you. What's the best way that they can if they have some remaining questions about licensing?

30:08
Yeah, well, one, you could check out my YouTube channel house of royalties. And you'll be able to send an email if you want. If you guys have any questions or, you know, to keep more curious about licensing, you can email me at Seth at House of royalties.com S E. F, at House of royalties.com.

30:29
Okay, perfect. Thank you, Seth. As always, it's it's a pleasure to speak with you a lot of great information about licensing. And I love that analogy to renting. So you know, if you want to rent your idea if you don't want to sell it, licensing is the way to go. Seth brings a lot of great knowledge to to our group here. So thank you so much. Thank you. All right.

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