licensing & ip valutation
Post on 21-Oct-2014
664 views
DESCRIPTION
By Ruth FischerTRANSCRIPT
Licensing andIP Valuation
Ruth Fisher, PhDwww.QuantAA.com
www.QuantAA.com 2
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
www.QuantAA.com 3
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
www.QuantAA.com 4
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
www.QuantAA.com 5
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
www.QuantAA.com 6
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.
www.QuantAA.com 7
Components of IP Valuations
IP Value = Sum for all Fields of Use i of
(Present Discounted Value)i
of (Profit)i
www.QuantAA.com 8
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
www.QuantAA.com 9
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)
www.QuantAA.com 10
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
www.QuantAA.com 11
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?
www.QuantAA.com 12
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)
www.QuantAA.com 13
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%
www.QuantAA.com 14
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
www.QuantAA.com 15
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%)
www.QuantAA.com 16
$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.)
www.QuantAA.com 17
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%)
www.QuantAA.com 18
$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.)
www.QuantAA.com 19
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
www.QuantAA.com 20
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.
www.QuantAA.com 21
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
www.QuantAA.com 22
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
www.QuantAA.com 23
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
www.QuantAA.com 24
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
www.QuantAA.com 25
Size of Product Market
Total Population
Old Market = New Market
Marginal Change
Total Population
Old Market
Revolutionary Change
New Market
www.QuantAA.com 26
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
www.QuantAA.com 27
Contribution of IP to Profits
IP at Issue
Other IP
Mfg Risk
OtherBusiness Risk
Non-PatentedComponents
www.QuantAA.com 28
Economic Analysis (cont.)
Manufacturing/Supply FactorsCapacity ConstraintsAccess to Raw MaterialsAccess to ConsumersRegulatory Environment
Tariffs Quotas Price Caps
www.QuantAA.com 29
Economic Analysis (cont.)
Demand FactorsConsumer Appeal v. Alternatives
Marginal v. Revolutionary Change
Consumer Switching Costs
Consumer Acceptance of Product
www.QuantAA.com 30
Economic Analysis (cont.)
Demand Factors (cont.)
Potential for Sales of Complementary Products
Product Lifecycle Adoption/Diffusion Curve Repeat Sales Market Saturation Current/Future Substitutes
www.QuantAA.com 31
Product Lifecycle
Time
Sale
s
Current Sales Alt'v Current Sales Market SaturationRepeat Sales Future Substitute
www.QuantAA.com 32
Profit Allocation: Licensor v. Licensee
Profit from Invention
Licensor’sShare Licensee’
sShare
www.QuantAA.com 33
Profit Allocation: Licensor v. Licensee
Form of AllocationTypes
Up-Front PaymentMilestone PaymentsRoyalty Payments
www.QuantAA.com 34
Profit Allocation: Licensor v. Licensee (cont.)
Form of Allocation (cont.)
How DeterminedDeliverables?Transfer of knowledge?Risk Sharing
www.QuantAA.com 35
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
www.QuantAA.com 36
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
www.QuantAA.com 37
Contact Information