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Monetizing Intellectual Assets as a Business Michael H. Baniak, Partner Chicago Office firstname.lastname@example.org
©2014 Seyfarth Shaw LLP Overview Is it essential today for companies to be constantly demonstrating value generation from their IP assets? Investing considerable corporate resources in Intellectual Property – what’s my return? Incorporating into products – is that enough? External value generation through licensing/leverage 2 Multiple ways in the current environment for generating revenue Internal resourcing External funding/resource/outsource
©2014 Seyfarth Shaw LLP Current IP Trends 3 The patent market – particularly for sizable blocks of patents – is fluid with many transactions happening Valuations of patents/portfolios can be challenging The patent transaction “market” is not efficient and very immature The reality of invention novelty Lack of “standards” – can there really be any? Patent quality or quantity Valuable brands are more straight-forward to license and finance and collateralize Your brand is your most strategically valuable asset Internal decision processes generally different How do you want your customers to see your brand in the market?
©2014 Seyfarth Shaw LLP Current Patent Marketplace Patents have become more valuable assets leading to more and not less focus, and litigation Significant 3 rd party financial resources have flowed into the Patent Market Rarely do companies pay for the use of your patent rights unless there is a threat of litigation Patent litigation is more complex - more expensive – multi-jurisdiction Infringement generally “pays” – the results of most litigation is paying a royalty after the fact The lack of injunctions combined with making of damages more difficult has emboldened defendants/infringers As proving damages for plaintiffs has become more difficult, defendants have become increasingly more bold 4
©2014 Seyfarth Shaw LLP Current Trends in Patent Valuation “Quality” and “Quantity” patent rights are being highly demanded A lot of $ chasing patents – is it the beginning, middle or end of the patent purchasing bubble? Many unique transactions are occurring: Large technology companies selling patents to both established and establishing patent holding/assertion entities Companies are being formed to buy, hold and assert patents Hedge fund activity is strong – demand for high returns will come Intellectual Ventures goes from largest buyer to largest “troll” Found that licensing without litigation wasn’t so easy Companies looking to “cash out” on their IP 5
©2014 Seyfarth Shaw LLP Options for External Monetization Sale Partnership or JV Debt New Business Models 6
©2014 Seyfarth Shaw LLP Sales and Partnerships SalePartnership or JV Buyer may be strategic or patent assertion entity (PAE) Short-term relationship Upfront payment, back-end interest or hybrid Little to no ongoing involvement or support License back Buyer generally a PAE Longer-term relationship Includes some form of continuing interest Percentage of profit or revenue Equity May provide ongoing support Access to R&D labs for technical support and reverse engineering Options to acquire additional assets Can include control over operations Board seat Ability to suspend assertion against some sensitive customers 7
©2014 Seyfarth Shaw LLP Ecosystem of Patent Monetization 8
©2014 Seyfarth Shaw LLP IP Collateralized Debt Short-term loans Interest rates around 10-15% Typically involve warrants Covenants Limited ability to enforce IP Strict maintenance obligations 9
©2014 Seyfarth Shaw LLP New Business Models 10 Industry consortiums Work with industry groups pooling funds to collectively purchase IP Exchanges Contribute portfolio to create tradable license rights Future Innovations?
©2014 Seyfarth Shaw LLP Components of Intangible Assets/ Intellectual Capital 11 Intangible Value Intangible Value Book Value Book Value Intangible Assets Knowledge Capital Intellectual Property Market Value Intellectual Assets
©2014 Seyfarth Shaw LLP Key Intellectual Property Assets 12 Patents Copyrights Trade Secrets Know-how Trade Marks/Names Trade Dress
©2014 Seyfarth Shaw LLP Patents Have Become More Valuable We have become a knowledge economy Patents have become trading commodities and a common article of commerce “Everyone is doing it” Markets have placed significant value on company intangibles 13
©2014 Seyfarth Shaw LLP Measurable Components of Intangible Assets 14 Patents, Trademarks, Copyrights, Trade Secrets and Know-how generally make up “Intellectual Property” Patents, Trademarks, Trade Names, Trade Secrets and Copyrights can be “measured, documented, evaluated and valued” “Know-how”, “Show-how”, Critical Skills and Key Personnel are more difficult to “measure” but can be evaluated and valued More difficult to “value” and understand other intangibles – but referential value and importance can be determined
©2014 Seyfarth Shaw LLP Factors that May Drive Company Value Generating Capacity from Intellectual Property The relevance of the Intellectual Property to the cash and income generating capabilities of the Company The relative protection and exclusivity that the IP provides The sustainable competitive advantages that the IP provides The economic life of the existing IP and the company’s capabilities to efficiently generate new, important and relevant IP in the future and bring that IP to market 15
©2014 Seyfarth Shaw LLP Execution Intangibles Long term value or the difference in market value from one company to another may not necessarily be the amount of Intellectual Property or the Capability to Produce Intellectual Property but rather the Process Capability to Execute Business Strategies Over the Medium and Long Term in Concert with the Creation and Leverage of IP 16
©2014 Seyfarth Shaw LLP Ways of Using or Disposing of IA/IP “Highest to Lowest Value Potential” Use it internally in your own products Use it in some type of joint venture Use it as “contribution assets” to a new company, start-up or venture in exchange for an equity position License in exchange for $ or for rights to IP such as cross licensing Use as collateral for financing Defensive positioning To have nice plaques to put on the wall 17
©2014 Seyfarth Shaw LLP How Value is Created Through IP and Licensing Value is created when a company invents/establishes an exclusive area of competitive advantage and exploits it Valuable intellectual property is created when it blocks third parties from a key defined “space” Creating intellectual property which is broad in scope and provides licensing potential both inside and outside of a company’s areas of business interest Out-licensing IP brings in revenue and profit – high margins Out-licensing and in-licensing bring in key “technology properties” of value to the company – acquire unique assets/capabilities Value is created when a company establishes a zone of “freedom to operate” through its intellectual property development 18
©2014 Seyfarth Shaw LLP “Extraction” Strategy Deployment 19 What Have You Got For IP Assets in Inventory? – Periodic Portfolio Evaluation “Highest and Best Use” Assessment Maintain Exclusivity – Use only internally – Core Asset Joint Venture – Its Core but we don’t have all capabilities “Embedded” – Part of another deal – “leverage” – does not stand on its own Spinout – The “Equity Play” and/or “It will die here…..” License – Income Stream Sale – Non-Core Assets – get value while they are viable
©2014 Seyfarth Shaw LLP Considerations for “Extraction” Strategy Development Alignment with Overall Corporate Business Strategy Alignment with Corporate R&D/Internal Exploitation Strategy Core vs. Non-Core Technologies “Product Development” Capabilities Nature of Your Assets – What have you got? Relevant Industry – Growing, Surviving or Dying Scope of Licensable Rights Revolutionary, Evolutionary or “Alternative” Available “Licensing Resources” – Current and Future Business Technical Transactional – Scope, Experience and Capabilities 20
©2014 Seyfarth Shaw LLP Capabilities to Create Value From Your Technology Valuable Technology Which Creates A Clear Competitive Advantage Generates incremental revenue Reduces costs Creates new line/scope/category of products Highly Capable and Highly Motivated Workforce Risk oriented Technical and Business Visionary Access to a Ready and Available Source of Reasonably Priced Risk Capital or Access to Corporate Internal Funding 21
©2014 Seyfarth Shaw LLP Capabilities To Create Value From Your Technology (cont.) Management Team with Vision and a Clear Understanding of the Technology Skilled in handling strengths of the team to bring product through development/implementation to the market place Low Cost/Efficient Manufacturing and/or Fabrication Need return on all assets/activities Ready Access to Markets and Customers A Solid Business Plan and Implementation Strategy Focusing on Developing, Making and Selling Products with the Likelihood that Revenues and Profits will be Generated 22
©2014 Seyfarth Shaw LLP What’s Needed to License a Technology? 23 Licensable Technology Licensable Technology Identifiable assets - patents, trade secrets, know how Proof of concept - reduction to practice, prototypes Identifiable applications within the scope of our rights Technology Identifiable assets - patents, trade secrets, know how Proof of concept - reduction to practice, prototypes Identifiable applications within the scope of our rights Market A business proposition that meets a market need Strong technology - market match Competitive advantage over alternative technologies Technology in use: “Proven value” Large, growing markets for licensable uses Market A business proposition that meets a market need Strong technology - market match Competitive advantage over alternative technologies Technology in use: “Proven value” Large, growing markets for licensable uses People A technology champion Prior business analyses from a business and/or technology team Scientists to give industry presentations Technical publications supporting the concept People A technology champion Prior business analyses from a business and/or technology team Scientists to give industry presentations Technical publications supporting the concept
©2014 Seyfarth Shaw LLP Impact of Stage of Development on Royalty Rates 24 Technology’s Stage of Development Percent Discount to Royalty Rate for Fully Developed Technology Discount Decreases as Technology Moves Closer to Fully Developed Source: Stephen A. Degnan and Corwin Horton, “A Survey of Licensed Royalty Rates,” les Nouvelles, June 1997.
©2014 Seyfarth Shaw LLP Licensing Process Overview 25 Identify prospective technologies Evaluate completeness Evaluate relatedness Map technologies to markets and markets to technologies Determine gross business scope Prioritize opportunities Package offerings Identify targets Develop/deploy marketing Qualify prospects Determine initial deal structure Refine deal structure into T’s & C’s Iterate T’s & C’s Review contracts Reach agreement Execute agreement Contract Admin Program Development Negotiation Technology Evaluation Opportunity Assessment
©2014 Seyfarth Shaw LLP A Common Theme in Developing A Successful Licensing Effort Licensing is a game of “what does he need” rather than “what have I got” Understanding the scope of the subject intellectual property Understanding how the intellectual property fits into the “Intellectual Property” or “Technology” marketplace External not internal focus Understanding the “field” from equivalent technical, legal and commercial bases 26
©2014 Seyfarth Shaw LLP Two Main Environments for Licensing 1.One time – “I am never going to see you again” licensing 2.“Relationship Licensing” – We will do other business together in the future Both factors come into play and are decision criteria for both “Opportunity” and “Stick” licensing 27
©2014 Seyfarth Shaw LLP28
©2014 Seyfarth Shaw LLP Critical Factors for Licensing Business Success Regardless of Your Structure – Cultural/Corporate Licensing-in is as important as licensing-out Access to core assets is critical to long term success Clearly understanding your bounds and mandate – access to enough assets of value to meet or exceed expectations Evolving the culture of your organization Cultivate “friends and allies” - licensing is a team sport Find a way to cause coordination within the company to happen Involvement in the front end of “asset creation” is important for long term success and value creation – partner with the technical and legal groups License know-how with patents – often more valuable 29
©2014 Seyfarth Shaw LLP Critical Factors for Licensing Business Success Regardless of Your Structure – Process/Structural Efficient understanding and identification of high value IP assets for licensing is key – “product development cost” Less than 10 percent of licensing is external negotiations – work hard and early to get internal consensus and reasonable terms Constant transactional efficiency improvement – bringing deals to closure – process and skills development Licensing/transactional “portfolio management” Develop/acquire an efficient/comprehensive business development/assessment process “Infringement” or “Stick” licensing is different – its likely necessary but treat it differently – proactively manage the different processes and expectations 30
©2014 Seyfarth Shaw LLP Critical Factors for Licensing Business Success Regardless of Your Structure – Financial/Practical Money can be made licensing non-core assets, but you cannot build a “business” around it Find “technologies of value” not “value in technologies” - learn to say no – drop “low value” technologies quickly Avoid “polarity” in negotiations Manage financial expectations – fight for reasonable metrics that are in concert with your mandate, access to assets, “true portfolio value” resources and stage of development Be realistic about projections and managing expectations – licensing deals can take a long time to close 31
©2014 Seyfarth Shaw LLP Not All Licenses are the Same Technology package Grants: non-exclusive or limited exclusive Field-of-Use: market or technology sector Geography: world-wide, country-specific Sub-licensing Rights to improvements Consideration: fees, royalties, equity position, grant- backs, other 32
©2014 Seyfarth Shaw LLP Thank You! 33 Michael H. Baniak Seyfarth Shaw LLP 131 South Dearborn Street, Suite 2400 Chicago, IL 60603 Direct: (312) 460-5837 Email: email@example.com And with grateful thanks to Mike Dansky, Capstone Advisory Group firstname.lastname@example.org
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