Licensing And Ip Valuation
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Licensing and IP Valuation Ruth Fisher, PhD www.QuantAA.com
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
2
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
www.QuantAA.com
3
Valuation Effort Required Circumstance Litigation Tax-Related Ventures Joint Ventures Intra-Company Transfers
Expected Level of Degree of Effort Scrutiny Required Very High High High High
www.QuantAA.com
Large Large Large Large 4
Valuation Effort Required (cont.)
Circumstance
Expected Level of Degree of Effort Scrutiny Required
Business Decision Medium Making Licensing Medium (Sale & Purchase) In-Kind Contribution Medium R&D Investment Medium www.QuantAA.com
Medium Medium Medium Medium 5
Valuation Effort Required (cont.)
Circumstance Portfolio Management Exploitation Potential Initial Estimate
Expected Level of Degree of Effort Scrutiny Required Medium Medium
Medium Medium
Low
Small
Source: Patrick H. Sullivan, Profiting from Intellectual Capital: Extracting Value from Innovation. John Wiley & Sons, Inc., 1998, p.183. www.QuantAA.com
6
Components of IP Valuations IP Value = Sum for all Fields of Use i of (Present Discounted Value)i of (Profit)i
www.QuantAA.com
7
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
8
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
9
Fields of Use Matrix Latin U.S. Europe America Food Entertain ment
$250M
$100M
$500M
$50M
Household $100M Products
$200M
www.QuantAA.com
$75M
Asia $50M
$100M $750M $50M
$0
10
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
11
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
12
Discount Factors: A Graphical Illustration 1.00
Discount Factor
1.00 0.80
0.67
0.60 0.44
0.40
0.30 0.20
0.20 0.00 1
2 r = 10%
3 Period r = 25%
www.QuantAA.com
4
5 r = 50%
13
Discounted Factor (t −1)
1 Discount Factort = , 1+r where t is the # periods in the future r is the discount rate (level of risk) Note : Discount Factor (Weight) • Decreases with time • Decreases with risk www.QuantAA.com
14
Present Discounted Value: A Tabular Example Period Period Period Period Period 1 2 3 4 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
Discount Factor r = 25%
1.00
Discount Factor r = 50%
1.00
(↓ 17%)
0.80
0.64
0.51
0.41
$3.36 (↓ 33%)
0.67
0.44
0.30
0.20
$2.61 (↓ 48%)
www.QuantAA.com
15
Present Discounted Value: A Tabular Example (cont.) $5.00
$5.00
r =0% r =10% r =25% r =50%
$4.17 $4.00 $3.36 $3.00
$2.61
$2.00
$1.00
$0.00 PDV
www.QuantAA.com
16
Present Discounted Value: Another Tabular Example Period Period Period Period Period 1 2 3 4 5
Discount Factor: r = 25%
PV
1.00 0.80 0.64 0.51 0.41
Nominal $ Nominal $
$1 $2
$1 $2
$1 $1
$1 $0
$1 $0
Nominal $
$0
$0
$1
$2
$2
www.QuantAA.com
$3.36 $4.24 (↑ 26%)
$2.48 (↓ 26%)
17
Present Discounted Value: Another Tabular Example (cont.) $5.00 Earlier Stream Constant Stream Later Stream
$4.24 $4.00 $3.36 $3.00
$2.48
$2.00
$1.00
$0.00 PDV
www.QuantAA.com
18
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
19
Sample Discount Rates Stage of Development
Discount Rate 1
Discount Rate 2
Basic Intermediate Advanced
50% 30-40% 25%
50-75% 30-50% 0-30%
Source
Gordon V. Smith and Russell L. Parr, Patrick H. Sullivan, Profiting from Valuation of Intellectual Property and Intellectual Capital: Extracting Value from Intangible Assets, 3rd Edition. John Wiley & Innovation. John Wiley & Sons, Inc., 1998, Sons, Inc., 2000, p.506. p.339.
www.QuantAA.com
20
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
21
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
22
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
23
Economic Analysis (PDV of future profit streams)
Intrinsic Value Factors Benefits Size
of IP relative to Alternatives
of Product Market
Marginal Change:
Market ~ Existing Users
Revolutionary Change:
Market ~ Existing Users + New Users
www.QuantAA.com
24
Size of Product Market Marginal Change
Revolutionary Change Total Population
Total Population
New Market Old Market = New Market
Old Market
www.QuantAA.com
25
Economic Analysis Intrinsic Portion Other
Value Factors
(cont.)
of Realizable Profit from Invention v. Patented Components
Non-Patented
Components
Manufacturing Other
(cont.)
Risk
Business Risk
www.QuantAA.com
26
Contribution of IP to Profits IP at Issue Other IP Mfg Risk Other Business Risk Non-Patented Components
www.QuantAA.com
27
Economic Analysis
(cont.)
Manufacturing/Supply Factors Capacity
Constraints Access to Raw Materials Access to Consumers Regulatory Environment Tariffs Quotas Price Caps
www.QuantAA.com
28
Economic Analysis Demand
Factors
Consumer Marginal
(cont.)
Appeal v. Alternatives
v. Revolutionary Change
Consumer
Switching Costs
Consumer
Acceptance of Product
www.QuantAA.com
29
Economic Analysis
Demand Factors Potential
Products
Product
(cont.)
(cont.)
for Sales of Complementary
Lifecycle
Adoption/Diffusion Curve Repeat Sales Market Saturation Current/Future Substitutes
www.QuantAA.com
30
Sales
Product Lifecycle
Time Current Sales Repeat Sales
Alt'v Current Sales Future Substitute
www.QuantAA.com
Market Saturation
31
Profit Allocation: Licensor v. Licensee Profit from Invention Licensor’ s Licensee’ Share s Share www.QuantAA.com
32
Profit Allocation: Licensor v. Licensee Form
of Allocation
Types Up-Front
Payment
Milestone Royalty
Payments
Payments www.QuantAA.com
33
Profit Allocation: Licensor v. Licensee (cont.)
Form How
of Allocation
(cont.)
Determined
Deliverables? Transfer Risk
of knowledge?
Sharing www.QuantAA.com
34
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:1 4 − 13 of net profits www.QuantAA.com
35
Maximization of IP Value Capture Rank
all fields of use
applications by profitability
Rank
applications by probability of success
Consider
who is most suited to exploit each application
www.QuantAA.com
36
Contact Information
www.QuantAA.com
37
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
2
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
www.QuantAA.com
3
Valuation Effort Required Circumstance Litigation Tax-Related Ventures Joint Ventures Intra-Company Transfers
Expected Level of Degree of Effort Scrutiny Required Very High High High High
www.QuantAA.com
Large Large Large Large 4
Valuation Effort Required (cont.)
Circumstance
Expected Level of Degree of Effort Scrutiny Required
Business Decision Medium Making Licensing Medium (Sale & Purchase) In-Kind Contribution Medium R&D Investment Medium www.QuantAA.com
Medium Medium Medium Medium 5
Valuation Effort Required (cont.)
Circumstance Portfolio Management Exploitation Potential Initial Estimate
Expected Level of Degree of Effort Scrutiny Required Medium Medium
Medium Medium
Low
Small
Source: Patrick H. Sullivan, Profiting from Intellectual Capital: Extracting Value from Innovation. John Wiley & Sons, Inc., 1998, p.183. www.QuantAA.com
6
Components of IP Valuations IP Value = Sum for all Fields of Use i of (Present Discounted Value)i of (Profit)i
www.QuantAA.com
7
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
8
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
9
Fields of Use Matrix Latin U.S. Europe America Food Entertain ment
$250M
$100M
$500M
$50M
Household $100M Products
$200M
www.QuantAA.com
$75M
Asia $50M
$100M $750M $50M
$0
10
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
11
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
12
Discount Factors: A Graphical Illustration 1.00
Discount Factor
1.00 0.80
0.67
0.60 0.44
0.40
0.30 0.20
0.20 0.00 1
2 r = 10%
3 Period r = 25%
www.QuantAA.com
4
5 r = 50%
13
Discounted Factor (t −1)
1 Discount Factort = , 1+r where t is the # periods in the future r is the discount rate (level of risk) Note : Discount Factor (Weight) • Decreases with time • Decreases with risk www.QuantAA.com
14
Present Discounted Value: A Tabular Example Period Period Period Period Period 1 2 3 4 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
Discount Factor r = 25%
1.00
Discount Factor r = 50%
1.00
(↓ 17%)
0.80
0.64
0.51
0.41
$3.36 (↓ 33%)
0.67
0.44
0.30
0.20
$2.61 (↓ 48%)
www.QuantAA.com
15
Present Discounted Value: A Tabular Example (cont.) $5.00
$5.00
r =0% r =10% r =25% r =50%
$4.17 $4.00 $3.36 $3.00
$2.61
$2.00
$1.00
$0.00 PDV
www.QuantAA.com
16
Present Discounted Value: Another Tabular Example Period Period Period Period Period 1 2 3 4 5
Discount Factor: r = 25%
PV
1.00 0.80 0.64 0.51 0.41
Nominal $ Nominal $
$1 $2
$1 $2
$1 $1
$1 $0
$1 $0
Nominal $
$0
$0
$1
$2
$2
www.QuantAA.com
$3.36 $4.24 (↑ 26%)
$2.48 (↓ 26%)
17
Present Discounted Value: Another Tabular Example (cont.) $5.00 Earlier Stream Constant Stream Later Stream
$4.24 $4.00 $3.36 $3.00
$2.48
$2.00
$1.00
$0.00 PDV
www.QuantAA.com
18
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
19
Sample Discount Rates Stage of Development
Discount Rate 1
Discount Rate 2
Basic Intermediate Advanced
50% 30-40% 25%
50-75% 30-50% 0-30%
Source
Gordon V. Smith and Russell L. Parr, Patrick H. Sullivan, Profiting from Valuation of Intellectual Property and Intellectual Capital: Extracting Value from Intangible Assets, 3rd Edition. John Wiley & Innovation. John Wiley & Sons, Inc., 1998, Sons, Inc., 2000, p.506. p.339.
www.QuantAA.com
20
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
21
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
22
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
23
Economic Analysis (PDV of future profit streams)
Intrinsic Value Factors Benefits Size
of IP relative to Alternatives
of Product Market
Marginal Change:
Market ~ Existing Users
Revolutionary Change:
Market ~ Existing Users + New Users
www.QuantAA.com
24
Size of Product Market Marginal Change
Revolutionary Change Total Population
Total Population
New Market Old Market = New Market
Old Market
www.QuantAA.com
25
Economic Analysis Intrinsic Portion Other
Value Factors
(cont.)
of Realizable Profit from Invention v. Patented Components
Non-Patented
Components
Manufacturing Other
(cont.)
Risk
Business Risk
www.QuantAA.com
26
Contribution of IP to Profits IP at Issue Other IP Mfg Risk Other Business Risk Non-Patented Components
www.QuantAA.com
27
Economic Analysis
(cont.)
Manufacturing/Supply Factors Capacity
Constraints Access to Raw Materials Access to Consumers Regulatory Environment Tariffs Quotas Price Caps
www.QuantAA.com
28
Economic Analysis Demand
Factors
Consumer Marginal
(cont.)
Appeal v. Alternatives
v. Revolutionary Change
Consumer
Switching Costs
Consumer
Acceptance of Product
www.QuantAA.com
29
Economic Analysis
Demand Factors Potential
Products
Product
(cont.)
(cont.)
for Sales of Complementary
Lifecycle
Adoption/Diffusion Curve Repeat Sales Market Saturation Current/Future Substitutes
www.QuantAA.com
30
Sales
Product Lifecycle
Time Current Sales Repeat Sales
Alt'v Current Sales Future Substitute
www.QuantAA.com
Market Saturation
31
Profit Allocation: Licensor v. Licensee Profit from Invention Licensor’ s Licensee’ Share s Share www.QuantAA.com
32
Profit Allocation: Licensor v. Licensee Form
of Allocation
Types Up-Front
Payment
Milestone Royalty
Payments
Payments www.QuantAA.com
33
Profit Allocation: Licensor v. Licensee (cont.)
Form How
of Allocation
(cont.)
Determined
Deliverables? Transfer Risk
of knowledge?
Sharing www.QuantAA.com
34
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:1 4 − 13 of net profits www.QuantAA.com
35
Maximization of IP Value Capture Rank
all fields of use
applications by profitability
Rank
applications by probability of success
Consider
who is most suited to exploit each application
www.QuantAA.com
36
Contact Information
www.QuantAA.com
37
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