Chapter 14

Chapter 142,273 wordsPublic domain

HOW TO ARRIVE AT THE VALUE OF A PATENT

Most inventors are not concerned so much about the fame or honor their inventions will bring them, or how much their inventions will advance civilization, or build up a nation, or administer to the conveniences and pleasures of mankind generally, as they are about how much it will net them in dollars and cents; but the patentee should not lose sight of the fact that the profits are in the exact proportion to the actual usefulness of the invention, and its general adaptability. It is immaterial whether the inventor himself intends to deal with the public, or to deal with a man or set of men who are afterward to deal with the public, the conditions are the same, and the profits must ultimately come from the sale of the manufactured article.

[Sidenote: Pecuniary Value.]

It may seem superfluous to say that mere Letters Patent aside from an invention is of no value, though many inventors are under the erroneous impression that if an invention possesses patentability, it must also necessarily have pecuniary value. To be of any pecuniary value whatever, the invention must cover something for which there is a demand, or for which there can be a demand created, for it cannot be disputed, that if an invention will not bring in money by manufacturing it, it is, in a financial sense, worthless; and the patent thereon is therefore worth some seventy or eighty dollars less than nothing.

[Sidenote: Commercial Value.]

An invention, to have commercial value, as previously stated, must cover something for which there is a demand, or for which there can be a demand created. It may be an entirely new device, or it may be an improvement upon an existing invention, but in any event it must contain a certain degree of utility. In rare cases inventors are able to hit upon an invention in an entirely new field; for these a demand has to be created. For improvements, however, as a general thing, the demand already exists; then the important question arises in determining the commercial value of the patent. "Does the invention in question possess sufficient merit to successfully compete with existing devices of the same class?" In order to do this, it must be of a simpler or cheaper construction, so that it can be manufactured and put on the market at a lower figure; or, it must yield better results, work quicker and at less expense, or economize power, labor, or time. A patented improvement upon an article that can be sold more cheaply, or one which will yield better results than those now selling well on the market, has a decided commercial value and can easily be disposed of at a good price. If the inventor be fortunate enough to combine both of these features in his invention, the value is doubled and success certain.

[Sidenote: Basis for Estimation.]

Perhaps one of the hardest questions that confronts the patentee is how to arrive at a just valuation of his patent, and to know just exactly what he should receive for it. This is a very important question, and one which should be looked into before undertaking negotiations. Patentees should not, of course, undervalue their patents, or accept the first small offer made for fear of not receiving another; at the same time, they should not fall into the common error of asking a price that cannot be obtained, which too frequently precludes all chances of a sale. Many business men would rather lose the patent than waste their time constantly dickering about an unreasonable price.

Inventors should be reasonable in their demands, and consider that the purchaser must have a fair share of the profits. He cannot expect to realize all there is in the patent himself. Indeed, patentees usually find that men willing to establish a business on the basis of their untried patents will require the greater bulk of the profits to be derived from it.

[Sidenote: General Rules for Valuation.]

It is evident that only the most general rules for valuation can be given, as each invention must be studied and valued strictly upon its own merits. Undoubtedly, the best and most practical method of ascertaining the value of any invention which is susceptible of being manufactured on a small scale is to have a limited quantity of the articles manufactured--say five hundred or a thousand--and try the experiment of introducing them in a small territory; that is, in a certain county, city, or town, taking great precaution in selecting a person who is capable of carrying forward the business in a business-like manner. This method demonstrates conclusively whether or not the invention will meet with success, and with these figures at hand the patentee will be prepared to prove, to the satisfaction of interested parties, just what the patent is really worth.

This method of procedure not only enables the patentee to get a just valuation of his patent, but also puts it in a more favorable position to be sold; since the commercial value is known and established, it no longer remains an experiment. Interested parties can take their calculations from these figures, and the patentee can exact a price in proportion to the success of the trial experiment.

In order to thus demonstrate the value of a patent, the patentee must possess and advance the necessary means to carry it forward, though, if the experiment prove at all successful, the profits derived from the articles sold will in nearly all cases more than offset the expense incurred. This is a very popular course with inventors, especially in handling small inventions, known as novelty or specialty patents.

If the patentee have not the means to successfully demonstrate the value of his patent by actual trial, as above outlined, then the next best course would be to inquire among reliable manufacturers and ascertain the lowest price for which the invention can be manufactured in large quantities, and the highest price at which it will retail; and then, by carefully studying the market, the patentee should be able to estimate the amount of competition, cost of selling, probable number of sales, interest on the investment, etc., and on these figures base the price he should receive for the patent, being careful to allow the purchaser a liberally fair profit.

While there are at present about ninety-five million inhabitants in the United States, it is scarcely probable that any invention has yet or ever will be made that will reach half this number of people. With an article of the most general adaptability, including both sexes, the inventor can hardly hope to reach more than a fourth of the entire population, though, of course, the invention may be subject to regular consumption, so that the people reached would naturally purchase the article again a number of times during the course of a year.

The statistics in the last chapter are given with the view of assisting patentees in determining what proportion of the population will likely want their inventions, and to enable them to estimate prices. In estimating the price to ask for a patent, patentees should not conceive and hang their hopes upon fabulous prices and immediate wealth, which too often dooms ambitious inventors to bitter disappointment; they should rather endeavor to look at their inventions from the purchaser's stand-point, and try to see it in the light in which others view it. It may be well to remember that the million mark of patents issued in the United States, including re-issues and designs, was passed in 1911, and it is quite probable that any one inventor may not have the only good thing in the line of patents.

[Sidenote: How Rating for Royalty Is Figured.]

Many patents are more profitable by being placed upon royalty than by any other means, and quite often the patent can be placed this way when it is not possible to sell outright at a satisfactory price. In determining what royalty the patentee should receive, he should carefully estimate, in connection with the probable number of sales, what profit the manufacturer can probably make on each, or a number of the articles containing the patented improvements, and should require about twenty-five per cent. of the profits as royalty. Another method used by some inventors is to ascertain the price at which the article can be retailed, and figure the royalty at between one-twentieth and one-tenth of the retail price. Either of the above should give the approximate figure to ask for exclusive royalty contracts. For non-exclusive rights the patentee should ask about one-half of that for exclusive rights.

[Sidenote: Stock in Stock Companies.]

There is another class of patents that can be best realized from by organizing the proper kind of joint stock companies, and manufacturing the invention, the inventor taking a certain amount of the stock and assigning the patent to the company. The patentee should receive between one-fourth and one-half of the capital stock in consideration of his assigning his patent and rights to the company.

The inventor should see that a good portion of the stock is subscribed for and the amount actually paid into the treasury of the company before making the assignment. As a rule, inventors' stock is full paid and non-assessable.

[Sidenote: Prices for Territorial Rights.]

In calculating the prices for territorial rights, the application of the invention to that section must be taken into consideration, as well as the advancement in manufacturing, etc. If the invention belongs to that class of inventions which may be generally adapted in all States alike, such as domestic articles and articles of wearing apparel, then the population will form a very satisfactory basis for valuation.

There are other inventions, however, that apply almost wholly to a certain section of the country, while still others apply more to one section than to another; thus, for instance, mechanical contrivances of the higher order, such as writing machines, mathematical instruments, etc., the North and East are the most valuable; for mining and agricultural implements, etc., the West; while such as the cotton-gin, seeders, and presses apply almost wholly to the South. States and counties having large cities and large towns are also usually more valuable than other States and counties of same population.

[Sidenote: Valuation Tables.]

The following tables are given as a general estimate of the relative value of the different States and divisions in the majority of cases; however, these tables are only arbitrary at best, and cannot be applied to all classes of inventions satisfactorily, though they may serve to materially aid the patentee in determining what price to put upon each State in his own case. Having determined the value of the patent as a whole, the aggregate of the State prices should be about two-thirds more, as there are always some States that cannot be sold separately, while others may have to be sold at a discount.

TABLES FOR ESTIMATING PRICES OF STATE RIGHTS

TABLES FOR ESTIMATING PRICES OF STATE RIGHTS--_Continued_

+-------------------------------------------------- STATES AND | PRICE AS A WHOLE. TERRITORIES. |---------+---------+----------+----------+-------- | $1,000 | $5,000 | $10,000 | $15,000 | $20,000 -----------------+---------+---------+----------+----------+-------- Delaware | 20 | 100 | 200 | 300 | 400 Maryland | 40 | 200 | 400 | 600 | 800 District of | 15 | 75 | 150 | 200 | 300 Columbia | | | | | Virginia | 35 | 200 | 400 | 600 | 800 West Virginia | 35 | 175 | 300 | 500 | 700 North Carolina | 35 | 150 | 300 | 450 | 600 South Carolina | 35 | 150 | 350 | 500 | 700 Georgia | 40 | 200 | 400 | 600 | 800 Florida | 15 | 75 | 150 | 200 | 300 +---------+---------+----------+----------+-------- S. ATLANTIC | $270 | $1,325 | $2,700 | $3,950 |$5,400 DIVISION | | | | | | | | | | Ohio | 60 | 300 | 600 | 900 | 1,100 Indiana | 55 | 275 | 550 | 800 | 1,000 Illinois | 65 | 300 | 650 | 950 | 1,200 Michigan | 45 | 200 | 350 | 600 | 800 Wisconsin | 40 | 150 | 275 | 400 | 500 Minnesota | 45 | 200 | 350 | 600 | 800 Iowa | 40 | 175 | 350 | 500 | 700 Missouri | 45 | 225 | 450 | 650 | 900 North Dakota | 25 | 75 | 150 | 200 | 300 South Dakota | 30 | 100 | 200 | 300 | 400 Nebraska | 30 | 150 | 300 | 450 | 600 Kansas | 40 | 175 | 300 | 500 | 700 +---------+---------+----------+----------+-------- N. CENTRAL | $485 | $2,325 | $4,525 | $6,850 |$9,000 DIVISION | | | | | -----------------+---------+---------+----------+----------+--------

TABLES FOR ESTIMATING PRICES OF STATE RIGHTS--_Continued_

+-------------------------------------------------- STATES AND | PRICE AS A WHOLE. TERRITORIES. |---------+---------+----------+----------+-------- | $1,000 | $5,000 | $10,000 | $15,000 | $20,000 -----------------+---------+---------+----------+----------+---------- Kentucky | 40 | 200 | 375 | 600 | 700 Tennessee | 30 | 175 | 350 | 500 | 700 Alabama | 30 | 150 | 300 | 450 | 600 Mississippi | 30 | 150 | 300 | 450 | 600 Louisiana | 35 | 175 | 300 | 500 | 700 Texas | 35 | 175 | 300 | 500 | 700 Oklahoma | 20 | 100 | 200 | 300 | 400 Arkansas | 20 | 75 | 150 | 200 | 300 +---------+---------+----------+----------+-------- S. CENTRAL | $230 | $1,200 | $2,275 | $3,500 |$4,700 DIVISION | | | | | | | | | | Montana | 15 | 100 | 175 | 250 | 300 Colorado | 40 | 175 | 350 | 350 | 700 New Mexico | 15 | 50 | 100 | 150 | 200 Arizona | 15 | 50 | 100 | 150 | 200 Utah | 15 | 50 | 100 | 150 | 200 Idaho | 10 | 50 | 75 | 100 | 200 Washington | 15 | 50 | 100 | 150 | 200 Oregon | 20 | 75 | 125 | 200 | 300 California | 50 | 250 | 450 | 700 | 900 +---------+---------+----------+----------+-------- WESTERN DIVISION | $235 | $975 | $1,800 | $2,750 |$3,700 +=========+=========+==========+==========+======== GRAND TOTAL | $1,600 | $7,600 | $15,000 |$22,500 |$30,000 -----------------+---------+---------+----------+----------+--------