Basics of Patent Valuation Guriqbal Singh Jaiya Director SMEs Division ( ) SMEs Division ( ) World...

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