Licensing and IP Valuation

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Licensing andIP Valuation

• Ruth Fisher, PhD
• www.QuantAA.com

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Outline

• When and Why You Need an Expert
• Components of IP Valuations
• Fields of Use
• Discount Factors
• Profit Streams
• Profit Allocation Licensor v. Licensee
• Issues re Maximization of IP Value

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When and Why You Need a Valuation Expert

• Cost of Expert Valuation
• 1,000s 10,000s
• Use an expert when accuracy and credibility are
  important
• Valuation subject to scrutiny
• Large investments will be made

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Valuation Effort Required
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Valuation Effort Required (cont.)
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Valuation Effort Required (cont.)
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Components of IP Valuations

• IP Value
• Sum for all Fields of Use i of
• (Present Discounted Value)i
• of (Profit)i

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Fields of Use

• A field of use is a specific application,
  industry, product line, or geography for the
  invention
• Each field of use may be developed, licensed,
  and/or marketed separately
• Each field of use must be valued separately

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Examples of Fields of Use

• Saran Wrap
• Meat packaging in the United States
• Book packaging in Europe
• Packaging of entertainment products (CDs, DVDs,
  etc.)
• Gift packaging (wrapping paper)

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Fields of Use Matrix
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Present Discounted Value

• Intuitively A dollar today is worth more than a
  dollar tomorrow, and discounting makes you
  indifferent between revenue in future and PDV of
  revenue today
• Discounting accounts for
• Time Value of Money Interest rate and/or
  opportunity cost (return on other projects)
• Technology Risks Will the invention yield a
  viable product?
• Marketing Risks Will there be demand for the
  product at a profitable price?

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Present Discounted Value (cont.)

• PDV is calculated by applying discount factors to
  future revenue streams
• Discount factors are weights for future
  relative to initial period
• Weights decrease with time
• Weights decrease with risk (discount rate)

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Discount Factors A Graphical Illustration
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Discounted Factor
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Present Discounted Value A Tabular Example
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Present Discounted Value A Tabular Example
(cont.)
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Present Discounted Value Another Tabular Example
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Present Discounted Value Another Tabular
Example (cont.)
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Discount Rates

• Discount Rates (Levels of Risk)
• Vary across Industries
• Increase with Time to Market
• Decrease with Stage of Development
• Basic Research Result Development of idea
• Prototype Development Stage Functionality of
  technology
• Pilot Production Stage Manufacturing ability
• Advanced Stage Product marketing and production

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Sample Discount Rates
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Profit If Successful

• Valuation Methods
• Cost-Based Approach Cost of reproducing/replacin
  g technology
• Market-Based Approach Price of similar
  technologies
• Economic Analysis PDV of future profit streams

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Cost-Based Approach

• (Cost of reproducing technology)
• Useful for determining whether to develop
  in-house or license
• Helps to put bounds on amount willing to pay or
  receive for license
• Does not account for market demand

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Market-Based Approach

• (Price of similar technologies)
• Requires
• existence of a market for comparables
• with open knowledge of terms of sale
• and willing parties to the negotiations
• Adjustments for comparability often subject to
  dispute
• See Economic Factors for determination of
  adjustments for comparability

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Economic Analysis

• (PDV of future profit streams)
• Intrinsic Value Factors
• Benefits of IP relative to Alternatives
• Size of Product Market
• Marginal Change
• Market Existing Users
• Revolutionary Change
• Market Existing Users New Users

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Size of Product Market
Marginal Change
Revolutionary Change
Total Population
Total Population
New Market
Old Market New Market
Old Market
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Economic Analysis (cont.)

• Intrinsic Value Factors (cont.)
• Portion of Realizable Profit from Invention v.
• Other Patented Components
• Non-Patented Components
• Manufacturing Risk
• Other Business Risk

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Contribution of IP to Profits
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Economic Analysis (cont.)

• Manufacturing/Supply Factors
• Capacity Constraints
• Access to Raw Materials
• Access to Consumers
• Regulatory Environment
• Tariffs
• Quotas
• Price Caps

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Economic Analysis (cont.)

• Demand Factors
• Consumer Appeal v. Alternatives
• Marginal v. Revolutionary Change
• Consumer Switching Costs
• Consumer Acceptance of Product

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Economic Analysis (cont.)

• Demand Factors (cont.)
• Potential for Sales of Complementary Products
• Product Lifecycle
• Adoption/Diffusion Curve
• Repeat Sales
• Market Saturation
• Current/Future Substitutes

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Product Lifecycle
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Profit Allocation Licensor v. Licensee
Profit from Invention
Licensors Share
Licensees Share
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Profit Allocation Licensor v. Licensee

• Form of Allocation
• Types
• Up-Front Payment
• Milestone Payments
• Royalty Payments

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Profit Allocation Licensor v. Licensee (cont.)

• Form of Allocation (cont.)
• How Determined
• Deliverables?
• Transfer of knowledge?
• Risk Sharing

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Profit Allocation Licensor v. Licensee (cont.)

• Size of Allocation Depends on
• Fees for similar licenses
• Stage of development
• Bargaining power of parties (alternatives
  available to each)
• Rules of Thumb

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Maximization of IP Value

• Capture all fields of use
• Rank applications by profitability
• Rank applications by probability of success
• Consider who is most suited to exploit each
  application

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Contact Information