licensing & ip valutation
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Licensing andIP Valuation
Ruth Fisher, PhDwww.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 importantValuation subject to scrutinyLarge investments will be made
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Valuation Effort Required
CircumstanceExpected Degree
of Scrutiny
Level of Effort
Required
Litigation Very High Large
Tax-Related Ventures High Large
Joint Ventures High Large
Intra-Company Transfers
High Large
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Valuation Effort Required (cont.)
CircumstanceExpected Degree
of Scrutiny
Level of Effort
Required
Business Decision Making
Medium Medium
Licensing (Sale & Purchase)
Medium Medium
In-Kind Contribution Medium Medium
R&D Investment Medium Medium
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Valuation Effort Required (cont.)
Circumstance
Expected Degree
of Scrutiny
Level of Effort
Required
Portfolio Management Medium Medium
Exploitation Potential
Medium Medium
Initial Estimate Low SmallSource: Patrick H. Sullivan, Profiting from Intellectual Capital: Extracting Value
from Innovation. John Wiley & Sons, Inc., 1998, p.183.
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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
U.S. Europe
Latin Americ
aAsia
Food $250M $100M $75M $50M
Entertainment
$500M $50M $100M $750M
Household Products
$100M $200M $50M $0
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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
1.00
0.20
0.30
0.44
0.67
0.00
0.20
0.40
0.60
0.80
1.00
1 2 3 4 5Period
Dis
count
Fac
tor
r = 10% r = 25% r = 50%
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Discounted Factor
risk with Decreases
with timeDecreases
(Weight)Factor Discount :Note
risk) of (level ratediscount theis
future in the periods # theis ere wh
,
r
t
r1
1FactorDiscount
1)(t
t
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Present Discounted Value: A Tabular Example
Period 1
Period 2
Period 3
Period 4
Period 5
PV
Nominal $ $1 $1 $1 $1 $1 $5.00
Discount Factor r = 10%
1.00 0.91 0.83 0.75 0.68 $4.17(↓
17%)
Discount Factor r = 25%
1.00 0.80 0.64 0.51 0.41 $3.36(↓
33%)
Discount Factor r = 50%
1.00 0.67 0.44 0.30 0.20 $2.61(↓
48%)
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$5.00
$4.17
$3.36
$2.61
$0.00
$1.00
$2.00
$3.00
$4.00
$5.00
PDV
r = 0%
r = 10%
r = 25%
r = 50%
Present Discounted Value: A Tabular Example (cont.)
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Present Discounted Value: Another Tabular Example
Period 1
Period 2
Period 3
Period 4
Period 5
PV
Discount Factor: r = 25%
1.00 0.80 0.64 0.51 0.41
Nominal $ $1 $1 $1 $1 $1 $3.36
Nominal $ $2 $2 $1 $0 $0 $4.24(↑
26%)
Nominal $ $0 $0 $1 $2 $2 $2.48(↓
26%)
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$4.24
$3.36
$2.48
$0.00
$1.00
$2.00
$3.00
$4.00
$5.00
PDV
Earlier Stream
Constant Stream
Later Stream
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
Stage of Developmen
t
Discount Rate 1
Discount Rate 2
Basic 50% 50-75%
Intermediate 30-40% 30-50%
Advanced 25% 0-30%
Source
Gordon V. Smith and Russell L. Parr, Valuation of Intellectual Property and
Intangible Assets, 3rd Edition. John Wiley & Sons, Inc., 2000, p.506.
Patrick H. Sullivan, Profiting from Intellectual Capital: Extracting Value from Innovation. John Wiley & Sons,
Inc., 1998, p.339.
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Profit If Successful
Valuation Methods Cost-Based Approach: Cost of
reproducing/replacing 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 AlternativesSize of Product Market
Marginal Change: Market ~ Existing Users Revolutionary Change: Market ~ Existing Users + New Users
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Size of Product Market
Total Population
Old Market = New Market
Marginal Change
Total Population
Old Market
Revolutionary Change
New 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
IP at Issue
Other IP
Mfg Risk
OtherBusiness Risk
Non-PatentedComponents
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Economic Analysis (cont.)
Manufacturing/Supply FactorsCapacity ConstraintsAccess to Raw MaterialsAccess to ConsumersRegulatory Environment
Tariffs Quotas Price Caps
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Economic Analysis (cont.)
Demand FactorsConsumer 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
Time
Sale
s
Current Sales Alt'v Current Sales Market SaturationRepeat Sales Future Substitute
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Profit Allocation: Licensor v. Licensee
Profit from Invention
Licensor’sShare Licensee’
sShare
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Profit Allocation: Licensor v. Licensee
Form of AllocationTypes
Up-Front PaymentMilestone PaymentsRoyalty Payments
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Profit Allocation: Licensor v. Licensee (cont.)
Form of Allocation (cont.)
How DeterminedDeliverables?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: profitsnet of 31
41
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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
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