basics of patent valuation guriqbal singh jaiya director smes division ( ) smes division ( ) world...
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Basics of Patent ValuationBasics of Patent Valuation
Guriqbal Singh JaiyaGuriqbal Singh JaiyaDirectorDirector
SMEs Division ( SMEs Division ( www.www.wipowipo..intint//smesme// ) )World Intellectual Property Organization World Intellectual Property Organization
(WIPO)(WIPO)
Inventions
• Of no economic value if not exploited• Generally of higher economic value if
protected by a patent (family of patents) and exploited
• Leveraging: Unlike a tangible product, an inventions or a patent may be licensed several times over to many others for the same or different purposes, in the same or different geographical areas, for the same or different duration; easier to license if patented
Phases of an Invention
Investment Phase– development– filing and prosecuting patents
Return on Investment Phase– commercialization– generating income
Stages of Technology 1
• embryonic stage of development
• new and needing further development
• market proven
• about to be supplemented or replaced by new developments
Stages of Technology 2
• untested idea
– outcome completely unknown
• working model (bench top)
– works in laboratory environment and justifies further development
• prototype
– feasibility shown, commercialization still not sure
• commercialized
– market success still not guaranteed
Commercializing Patents by...
• own manufacture and own marketing of patented product
• licensing of patent (portfolio)
• selling of (part of) the patent (portfolio)
• Permutations/combinations of above
Challenges in Valuation 1
Computing the value of a patent– always difficult; beauty/eye of the beholder ($$$)– more difficult in early stages than at the stage of
marketing a technology/product– legal, technical and commercial risks change
greatly during its legal life span• patent (granted with or without examination)
• technology/product does not work
• customer unable or unwilling to pay a profitable price
Challenges in Valuation 2
Computing the value of a patent– claims: quality of drafting; defensive/offensive– part of a bundle or not (royalty stacking; core or
not;defensive/offensive/prestige)– freedom to operate/use; convoyed sales; standard– complementary assets (other patents, know how,
skills, equipment, networks, etc)– disputes (ownership; validity; scope) – risk of obsolescence (balance legal/economic life)
Motivations For IP Valuation (1)
• Traditional Bank Financing
• Angel/Venture Capital Investing
• Licensing
• Sale, Merger, Acquisition
• Employee Compensation, Gift
• Bankruptcy/Liquidation
• IP Investment Holding Company
Motivations For IP Valuation (2)
• Taxation/Transfer Pricing
• Insurance
• Joint Ventures/Strategic Alliances
• Estate Duty
• Capital Markets/Securitization
• Enforcement/Litigation
• Off-balance sheet financing
Valuation:Those Interested are...
• Employees
• Investors
• Shareholders
• Investment Bankers
• IPO Specialists
• Wall Street analysts
• Merger & Acquisition Interests
• Licensees, Franchisees• Internal asset
Managers• International affiliates• The Media• Other Stakeholders
Standards of Value...• Fair Market Value• Market Value• Insurable Value• Fair Value• Collateral Value• Ad Valorem Value• Acquisition Value• Use Value• Investment Value
Valuation • Of a Company
• Of its IP Assets
• Due Diligence (Evaluate, Valuation)
• Accounting of Intangibles (Balance sheet)
Valuation Steps
A. Data Collection and Analysis (Due Diligence)
B. Valuation Methods
C. Economic Life Analysis
D. Value Conclusion
E. Reporting
Due Diligence...
• Cost of Valuation: May be high!
• Expensive: To be amortized over the life of the loan as a higher rate of interest
• Expertise: Quality of in-house or external valuation expert; team effort
• When (Timing)
• How often (Periodicity)
IP Valuation Methods
• Cost Approach
• Market Approach
• Income Approach
• Judicial Approach
Cost Approach
• Economic principle of substitution
• Reproduction cost (Exact replica)
• Replacement cost (Different form or appearance)
Cost Approach
COMPONENTS
• Materials
• Labor
• Overheads
• Intangible Asset Developer’s profit/reward
• Entrepreneurial Incentive
Cost Approach
OBSOLESCENCE
• Physical
• Functional
• Technological
• Economic
Market Approach
• Expected sale price at a specific time, in a particular market, based on comparable arm’s length market transactions
• Extensive knowledge of comparable data required
Income Approach
Present Value of Future Income Stream• Future Income Stream (Economic Income)
• Duration (Life: Legal, contractual, judicial, physical, technological, functional, analytical, economic)
• Risk (Uncertainty of receiving expected income; interest rates and investment climate)
Methods to Determine Income Stream
• Residual Earnings Approach
• Excess Earnings Approach
• Loss of Income Approach
• Relief From Royalty Approach
• Stock Options (Black-Scholes/Merton Approach)
Residual Earnings Approach
• Business Unit Scale
• Technology Scale
• Product Scale
• Trademark or Patent Scale
Residual Earnings Approach Methods
• Monte Carlo
• Knowledge Capital Score Card
• Tech Factor Method
• Crystal Ball
• Technology Risk and Reward Unit Metrics
• Technology Review Patent Scorecard
• @Risk
Judicial Approach
• Hypothetical Negotiation Between Willing Seller and Buyer
• Georgia Pacific Factors (15)
Georgia Pacific Factors (Patent)
1. Commercial success, current popularity, and profitability of Patented Product (PP);
2. Advantages of PP over old products;
3. Nature of patented invention, character of products embodying invention, benefits to those using the invention;
4. Likely profit margin on PP;
5. Portion of profit credited to patented invention;
Georgia Pacific Factors (Patent)
6. Benefit to non-patented items by sale of PP;
7. Duration and other terms and conditions of patent license;
8. Extent to which infringer has made use of the patented invention;
9. Prior and existing licenses under the patent;
10. Terms for licensing other technologies by licensee;
Georgia Pacific Factors (Patent)
11. Patent owner’s licensing and marketing policy;
12. Commercial relationship between the licensor and licensee;
13. Nature and scope of license: territories, field of use, exclusivity, etc;
14. Industry specific practices for comparable patents (established royalty agreements); and
15. Opinion of Experts
Trademark or Brand-related Bundle
• Logo and Logotype• Sub-brands• Domain Names• Trade dress• Related Copyrights• Secondary
trademarks• Advertising Concepts
• Graphics• Labeling and
Packaging design• Product shapes• Web-based assets
Attributes Affecting TM Value 1
• Age
• Use
• Potential for Expansion
• Potential for Exploitation
• Associations
• Connotations
• Timeliness
• Quality
Attributes Affecting TM Value 2
• Profitability
• Expenses of promoting
• Means of promoting
• Market share
• Market potential
• Name recognition
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