1. IP Valuation

2. “Valuation requires an intermediate perspective between ignorance and
certainty, involving the exercise of skill, experience and judgment”
……………(Razgatis) P I I N A O T V U A L

3. IP Valuation Objectives
To survey the basic principles of IP Valuation Techniques.
To develop a better appreciation for the role of Valuation in the business and academic environments.
To reinforce negotiation skills using Valuation as a routine practice.
To develop and establish practical guidelines and “Rules of Thumb” principles for OTT licensing.

4. IP - a ‘Right’ or ‘Asset’ or ‘Both’ -
Intellectual Property (IP) refers to an intellectual capital or intangible asset or an innovation or an idea which may or may not have a legal enforceable right. For example, the legal right of a patent is valid for only 20 years but the technology may still be an intellectual property.
Intellectual Property Rights (IPRs) on the other hand refers to a legally enforceable right. In case of a patent it authorizes the patentee to prevent others from using the technology for 20 years without his permission. However IPR does not necessarily result in to economic benefit, till it is commercialized.

5. Assets of Business entity
Intangible Assets
Tangible Assets
Good Will
Current Assets
Trademarks
Cash & marketable Securities
Technology
Intellectual Property (IP)
Fixed Assets
Property, plant, equipment
Know-how
Trade Secrets

6. Essentials of Recognition for Intangible Asset
Certainty of future economic benefits
The cost of the asset can be measured reliably

7. What is Value VALUE Seller Buyer
Value is not the price or cost, although at times they are equivalent.
Value is all future economic benefits of ownership compressed in one payment.
Value is continually changing as the future benefits increase or decrease with the passage of time.
VALUE: A negotiated amount agreed by the parties.
Seller
Buyer
VALUE
My Advantage
How Much to Ask
Demand
Alternatives
Need
Cost
Competition
Alternatives

8. What is Value Determining Value is complicated The Problems
We want to give a value to something that will take its final form and impact producers and consumers in the future.
But we can understand value only in terms of today situations.
Then we look at a valuation model that gives a present value of a future situation
The Problems
We don’t know what will happen with the technology during the development period.
We don’t know what will be the market dynamics at the time of market entrance.
We don’t know how the technology will impact the producer’s finances
We don’t know the future cost of money

9. Standards of Value Fair Market Value Fair Value Market Value
Investment Value
Collateral Value
Arm's-Length Standard
Other Standards of Value
Standards of Value

10. Premises of Value Highest and Best Use Criteria
Alternative Premises of Value
— Value in continued use, as part of a going- concern business enterprise
— Value in place, but not in current use in the production of income
— Value in exchange, as part of an orderly disposition
— Value in exchange, as part of a forced liquidation (fire sale)

11. Why Value your IP?
By ascribing a value to IP and placing it on your balance sheet, your business is more attractive to potential investors and buyers.
More specifically, if you invest the time and expense to identify and value your IP, you will benefit by:
Determining a better idea of the overall value of your business;
Provide a tool to measure and manage your assets;
Provide security and backing for lenders;
Provide taxation benefits (taxation deductions); and
Reducing the proportion of business’ net worth attributed to goodwill – important when selling a business.

12. IP Valuation & Value of IP
What is IP Valuation
It is a method/ process to leverage Intellectual Property to grow the business.
To understand the potential of Intellectual Property, estimation of its value becomes important.
IP Valuation & Value of IP
Value of IP = Price of IP
Value of IP represents the potential current and future benefits to the IP user
Price of IP represents the amount of money that ownership of an underlying IP would be exchanged between willing buyer and seller

13. General principles of IP Valuation
General factors
Value defined as present value of future benefits derived by the owner
Quantify future benefits and calculate present value
Fair market value
Highest money price prevailing
Open unrestricted market
Willing informed buyer and seller
Arms length and no compulsion to transact O E M N Y

14. Purposes and Uses of IP/ Intangible Asset Valuations
Financial Reporting
Sale Transaction Support
Licensing
Strategic Alliances
Infringement Damages
Transfer Pricing
Equity Raising
Collateral-based Financing

15. The criteria for recognising IP
To recognise, value and record your IP you must be able to:
Identify your IP as a separate, standalone Asset;
Sell or transfer your IP (i.e. brands and patents which can be sold or licensed);
Protect your IP (this will also increase the value of your IP); and
Recognise your IP as enduring in nature.

16. Motivation for IP Valuation
Traditional Bank Financing
Angel/Venture Capital Investing
Licensing
Sale, Merger, Acquisition
Employee Compensation, Gift
Bankruptcy/Liquidation
IP Investment Holding Company
Taxation/Transfer Pricing
Insurance
Joint Ventures/Strategic Alliances
Capital Markets/Securitization
Enforcement/Litigation
Off-balance sheet financing

17. Valuation issues
What exactly is the IP and how does the protection it affords add value to the business?
What is the useful economic life of the IP?
What is the strength of the IP ? Is the IP completely new, or a modification of existing IP? How broad are the patent claims for example?
What is the likelihood of technological change, and what are the capital requirements for such change?
Are there alternative technologies and/or competitive pressures? Are there any substitutes available and, if so, at what cost?
What effect will the skills and depth of management have on the exploitation of the IP ?
How will the market respond to the new technology? Will there be a resistance to change? Will there be any regulatory restrictions/difficulties?
Are there any strategic factors at play that make the IP more valuable in the hands of the acquirer?

18. PURPOSE - WHY VALUE IP?
To understand the assets held by the organization and improve decision making, particularly in relation to determining future investment or development. 1 2
To determine a ‘walk-away’ position in negotiations. 3
To secure financial investment. 4
To establish damages for infringements. 5
For legal and accounting standards requirements.
For taxation, particularly capital gains tax and stamp duty liabilities. 6

19. Benefits of value assessment
Targeted valuation of IP, technologies and products can generate significant awareness and incremental value throughout the organization by helping companies to:
Choose between market opportunities;
More effectively protect and leverage the IP portfolio and important technology necessary to capture innovation and future growth;
Develop a strategy for IP development and protection that is closely aligned with the company’s overall strategic goals;
Identify un-tapped value and revenue opportunities;
Compare and select projects for the best allocation of the development budget;
Better utilise the IP portfolio through various commercialization avenues such as licensing, donation, joint ventures, divestiture, transfer to suppliers, set-up of subsidiaries, spin-offs, etc.
Justify a return on investment for technology and patents;
Reflect overall company value more accurately on financial statements.

20. Identifying intangible assets
Industrial Property: patents covering products or processes, TM & service marks
Brands: marks, consumer goods, corporate names and identity;
Copyrights: computer software, documentation of processes & business methods
Valuable IP Assets
Publishing Rights: magazines, books, film and music rights;
Licenses: television and radio, franchises, distribution rights
Know-how

21. Simplified Valuation Process
Identified the source of IP
If outsourced, consult and seek professional Advice
If developed in house
Analyse the key benefits of IP
Determine preferred to market pathway
Determine preferred valuation method (choose at least two)
Comparable Benchmark
Future Income Stream
Cost Based
Elimination Approach
Undertake market research for specific figures and compare
Confirmed with professional advice AND/OR test

22. IP Assets Valuation-Different Approach
Cost Approach:
Estimates the value of underlying IP asset basing on historical cost incurred in developing the asset
Replacement cost
Reproduction cost.
Market Approach :
Based on the value of similar or comparable assets that have been exchanged, at arm’s length, in active market.
Cost Approach
Market Approach
Income Approach
Income Approach:
Based on the income-producing capability of underlying IP asset
Seeks to establish the net present value (hence use of discounted cash flow) 22

23. Technology Life Cycle

24. The Valuation Pyramid
Any valuation exercise can be viewed as a ‘pyramid,’ where each level supports the analysis generated on the level:
How the valuation analysis solves a business problem or answers a specific business question.
Solution
Deliverable
Business, legal & economic attributes of the IP asset are defined.
Methodology
Cost
Option
Income
Transaction
Specific quantification & financial analysis is performed to generate a financial result.
Profile
Legal
Business
Financial
Underlying rationale and key assumptions of the IP valuation.
Foundation
Purpose
Description
Premise
Standard

25. Top Damage Awards for US Patent Infringement Parties Award Date
(USD Million)
Date
1. Polaroid v. Eastern Kodak
873
Jan-91
2. Cordis v. Boston Scientific
324
Dec-00
3. Cordis v. Medtronic AVE
271
4. Howarth v. Steelcase
211
Dec-96
5. Smith International v. Hughes Tool
204
Mar-86
6. Procter & Gamble v. Paragon Trade
178
Aug-98
7. Exxon v. Mobil Oil
171
8. Viskase v. American National Can
164
Jul-99
9. Hughes Aircraft v. United States
154
Jun-94
10. 3M v. Johnson & Johnson
129
Sep-92 25

26. Intellectual Property Valuation
Valuation models may be broadly divided into two –
Static models
Estimate value of accumulated intellectual assets at a point in time.
Does not differentiate temporal differences in the accumulated IP.
Does not differentiate the differences among different categories of IA at the time of valuation.
This Way---
Dynamic models
Take into consideration the temporal difference in the accumulated intellectual assets (e.g. time value of money and riskiness of the forecast cash flow)
Value investments in intangibles each at a time. 26

27. Intellectual Property Valuation
Projected economic income of underlying IP Economic life
Discounting the projected economic income of the discrete projection period
Discounted Cash Flow
PV arrived at by the use of discount rate

28. Owner’s Value – Proprietor’s View
IP Valuation Concept
Market Value – Comparative Price in Market
Fair Value
IP Valuation Concept
Tax Value
Owner’s Value – Proprietor’s View 28

29. $ $ $ TM Brand vs. Trademark Market Capitalization vs. Book Value
A brand is more than a trademark or a logo. It is a trust mark. TM
The brand value is the intellectual capital or the intangible assets which is built over a period of time for the established quality and goodwill
A trademark is an IPR which authorises right of infringement to protect the brand value $ $
Market Capitalization vs. Book Value
Stock Market Valuation on the basis of price-earning ratio and earning per share is one of the major indication of the valuation of the enterprise which as a major content of intangible assets, in case of technology companies and for those which has established goodwill and brands. If we reduce the book value from such market capitalization, we arrive at the value of intangible assets. We can adjust it for market volatility on certain basis. $ 29

30. Non – Performing IP Assets
For-profit companies that own thousands of unused and unlicensed IP assets are the norm. To license out the unused IP assets, just as one would any other non-performing asset.
They actually have a negative cash flow, because the company must pay their annual patent maintenance fees.
Time Period
Economic Life - Product Life Cycle
— Discontinuous Innovation
— Congruent Innovation
Economic Life - Technological Obsolescence
Economic Life - Functional Obsolescence
Legislated/Statutory Life
Contractual Life 30

31. IP Valuation by ITAG
IP Mining
Recording and developing IP portfolio
Valuing portfolio with utmost care and prudency
Periodic review of portfolio to determine its current and future potential
Enlightenment of the under exploited assets

32. Conclusion
Valuation is not a science, but an external based on heterogeneous information pertaining IP, product and business project.
The benefit dramatically, however, by the input data and the scientific methodologies.
Because of the increasing importance company’s valuation, turning ideas and innovation profit is and will continue to be the biggest and the greatest reward of companies information age.
Understanding the affecting value favors the best allocation of fuels sound strategic decision making.