Transcript Basics of Patent Valuation Guriqbal Singh Jaiya Director SMEs Division ( www.wipo.int/sme/ ) World Intellectual Property Organization (WIPO)

Basics of Patent Valuation
Guriqbal Singh Jaiya
Director
SMEs Division ( www.wipo.int/sme/ )
World Intellectual Property Organization
(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)
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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)
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Taxation/Transfer Pricing
Insurance
Joint Ventures/Strategic Alliances
Estate Duty
Capital Markets/Securitization
Enforcement/Litigation
Off-balance sheet financing
Valuation:Those Interested are...
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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...
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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
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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
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Residual Earnings Approach
Excess Earnings Approach
Loss of Income Approach
Relief From Royalty Approach
Stock Options (BlackScholes/Merton Approach)
Residual Earnings Approach
• Business Unit Scale
• Technology Scale
• Product Scale
• Trademark or Patent Scale
Residual Earnings Approach Methods
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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
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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
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Age
Use
Potential for Expansion
Potential for Exploitation
Associations
Connotations
Timeliness
Quality
Attributes Affecting TM Value 2
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Profitability
Expenses of promoting
Means of promoting
Market share
Market potential
Name recognition