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

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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
important
 Valuationsubject to scrutiny
 Large investments will be made

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Valuation Effort
Required
Expected Level of
Circumstance Degree of Effort
Scrutiny Required

Litigation Very High Large

Tax-Related Ventures High Large
Joint Ventures High Large
Intra-Company High Large
Transfers
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Valuation Effort Required
(cont.)

Expected Level of
Circumstance Degree of Effort
Scrutiny Required

Business Decision Medium Medium

Making
Licensing Medium Medium
(Sale & Purchase)
In-Kind Contribution Medium Medium
R&D Investment Medium
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Medium 5
Valuation Effort Required
(cont.)

Expected Level of
Degree of Effort
Circumstance
Scrutiny Required

Portfolio Management Medium Medium

Exploitation Medium Medium
Potential
Initial Estimate Low Small
Source: 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
Latin
U.S. Europe America Asia

Food $250M $100M $75M $50M

Entertain $500M $50M $100M $750M
ment
Household $100M $200M $50M $0
Products

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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
1.00
Discount Factor

0.80
0.67

0.60
0.44
0.40 0.30
0.20
0.20

0.00
1 2 3 4 5
Period
r = 10% r = 25% r = 50%

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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
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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 1.00 0.91 0.83 0.75 0.68 $4.17

r = 10% (↓ 17%)

Discount Factor 1.00 0.80 0.64 0.51 0.41 $3.36

r = 25% (↓ 33%)

Discount Factor 1.00 0.67 0.44 0.30 0.20 $2.61

r = 50% (↓ 48%)

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Present Discounted
Value: A Tabular
Example (cont.)
$5.00
$5.00
r =0%
$4.17 r =10%
$4.00 r =25%
$3.36 r =50%

$3.00 $2.61

$2.00

$1.00

$0.00
PDV

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Present Discounted
Value: Another Tabular
Example
Period Period Period Period Period
1 2 3 4 5
PV
Discount Factor: 1.00 0.80 0.64 0.51 0.41
r = 25%
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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Present Discounted Value:
Another Tabular Example
(cont.)
$5.00
Earlier Stream
$4.24
Constant Stream
$4.00 Later Stream
$3.36

$3.00
$2.48

$2.00

$1.00

$0.00
PDV

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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 Discount Discount
Development Rate 1 Rate 2

Basic 50% 50-75%

Intermediate 30-40% 30-50%
Advanced 25% 0-30%
Gordon V. Smith and Russell L. Parr, Patrick H. Sullivan, Profiting from
Valuation of Intellectual Property and Intellectual Capital: Extracting Value from
Source Intangible Assets, 3rd Edition. John Wiley & Innovation. John Wiley & Sons, Inc., 1998,
Sons, Inc., 2000, p.506. 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
 SeeEconomic 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 Alternatives
 Size of Product Market
 Marginal Change:
Market ~ Existing Users
 Revolutionary Change:
Market ~ Existing Users + New Users

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Size of Product Market
Marginal Revolutionary
Change Change
Total
Total
Population
Population

New
Market

Old Market =
New Market Old
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

Other
Business Risk
Non-Patented
Components

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Economic Analysis (cont.)

 Manufacturing/Supply Factors
 Capacity Constraints
 Access to Raw Materials
 Access to Consumers
 Regulatory Environment
 Tariffs
 Quotas

 Price Caps

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Economic Analysis (cont.)

 Demand Factors
Consumer 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
Sales

Time
Current Sales Alt'v Current Sales Market Saturation
Repeat Sales Future Substitute

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Profit Allocation:
Licensor v. Licensee
Profit from
Invention

Licensor’
s
Share Licensee’
s
Share

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Profit Allocation:
Licensor v. Licensee
 Form of Allocation
Types
Up-Front Payment
Milestone Payments
Royalty Payments
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Profit Allocation:
Licensor v. Licensee
(cont.)
 Form of Allocation (cont.)
How Determined
Deliverables?

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:1 4 − 13 of net profits

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Maximization of IP
Value
 Capture all fields of use
 Rank applications by profitability
 Rankapplications by probability of
success
 Considerwho is most suited to
exploit each application

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Contact Information

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