IP valuation

IP Valuation

@ IIMB, 14th December 2012

Anjana Vivek
anjana@venturebean.com

Agenda

Background

Valuation methods

Practical perspectives: In pricing

Cases for discussion

Summary

VentureBean Consulting Private Limited 2 2

Intellectual Property
• Intellectual property has many forms,
visible and invisible…

– Patents
– Trademarks
– Industrial designs
– Service marks and commercial names
– Copyright
– Formulae
– Knowledge (people)
….and so much more

VentureBean Consulting Private Limited 3

Why Value

When do you think IP is to be valued?


Why Value
To
• Purchase
• Sell
• Plan for the future
• Report
• Evaluate value of work in progress
• Take decisions


Agenda

Background

Valuation methods



Summary


Valuation methods
These can be broadly classified into:

• Cost based
• Income based
• Market based
• Special: qualitative based; other
• Contingent claim (options)


Valuation methods
• Different experts have different classifications
of the various methods of valuation
• Within these methods, there are sub-methods
• Sometimes the methods overlap


Valuation process
• Review and selection of the method(s) of
valuation
• Understanding of issues which impact valuation
• Special situations and their impact on valuation


IP value
The value of the IP is from
• Economic benefit provided
• Specific to business or usage
• Has different aspects
– Accounting (book-linked) value
– Economic (market-linked) value
– Technical/Scientific (R&D-linked)value
– Strategic (usefulness /specific purpose)


IP value
Depends on objective and can vary widely
depending on purpose
• For decision making
• For accounting purposes – to show in
financial statements and reports to
management
• For reporting, internal/external
• For taxation purposes
• For sale/purchase
• For acquisition/merger


Valuation - Cost
Historical cost
• Costs associated can be identified with the IP
– direct, indirect; material, labour, expenses
• Subjectivity is however there in some areas
– Period for which costs should be accounted
– Which costs are to be included, which to be
excluded, some costs are incurred for multiple IPs


Valuation - Cost
Replacement cost
• Assign costs for different characteristics, eg.
for a geography, exclusivity, automatic
upgrades etc.
• Decisions on whether IP can be replaced
• Comparable purchase cost may be taken as
a benchmark


Valuation - Cost
Challenges and Issues
• Difficult to estimate at times
– How does one unbundle IP and non-IP costs
– Allocation of direct and indirect costs
– All costs may not be captured as books of account
typically capture costs relate
• Some costs may have build over many
years.. Eg. Brands in existence for decades..
• Cost may not be indicative of income
potential


Valuation – Market price
• Linked to deals and transactions in market-
place in recent times
• Sometimes this may be based on multiples
like M&A enterprise valuation
• May involve comparing of IP assets and deals
involved
• May involve reviewing royalty and licence
terms
• Need to understand features of IP, including
territorial rights, exclusivity, time horizon,
product features made available etc.


Valuation – Market price
• Market price of a deal may not necessarily be
indicative of value specific to current
requirement; for eg. the deal value may have
may have depended on some strategic
rationale
• How do you get transactions where you can
understand the market price (eg. Used cars
have a market price, but IP may not)


Valuation – Income based
• Discounted cash flow is popular
• Difficulty is in separating the income
associated with the IP alone
• Based on future expectations (synergies
/costs saved in M&A)


Valuation – Income based
• Discounts and multiples are difficult to
estimate
• Depends on scenarios projected, subjective
elements are involved
• May depend on business models which could
be difficult to think through in sufficient detail
in advance


Valuation – Qualitative
• Linked to key value drivers that are identified
• May be based on a scoring system, i.e for
brand value etc. Various parameters are
scored and used to determine possible value
• PhD’s in a bio-tech firm taken as an indicator
of value


Valuation – Qualitative
• Identification of key value drivers
• Value drivers may be only a partially
indicative of value
• May be subjectivity in scoring, depending on
who is doing this, whether an analyst or a
technical expert etc..


Valuation: relief from payment
• Assumes that if IP ownership was with
another company, royalty would have to be
paid for usage of IP
• Value is capitalised value of relief to company


Valuation: relief from payment
• Difficulties in identification of specific IP
benefit
• Some IPs may not be available readily in
market, to get a payment estimate
• Subjectivity regarding usage and usage terms
and conditions, as some payments are
specific to a case


Option
• Gives owner right (not obligation)
– to buy or sell asset
– at a predetermined price, the exercise price or the
strike price
– at or before the expiration of the option

• Right to buy – call option (bc)
Right to sell – put option (ps)


Option
• Asset pays off only under certain
contingencies:
– for a call option: if value of underlying asset
exceeds pre-specified value
– for a put option: if value of underlying asset is is
less than pre-specified value


Option
• Can be valued as a function of the following
– Current value
– Variance in value of underlying asset
– Strike price
– Time to expiration of option
– Riskless interest rate


Option: Applicability
• Contingent value rights providing protection to
stockholders in companies against stock price
declines - options
• Convertible debt - long term call options
• Patent can also be analysed as options on
product - initial outlay considered as the strike
price and the patent life may be likened to time
of expiration of option
• Abandonment of projects - options
Flexibility also has a value -
which is captured in the options model


Options
• Assumption on variance are difficult to defend
when options have long lifetimes
• Value of underlying asset if not traded may be
difficult to estimate


Agenda

Background

Valuation methods



Summary


IP value drivers
• Competence of team i.e.
– skill sets
– experience
– educational qualifications, institutes attended
• Projects in pipeline
• Nature of projects – i.e. quality of work done, not
just quantity


IP value drivers
• Growth in clients/associates due to core IP,
indirectly measuring impact of IP
• Additional efforts required in terms of time, cost
etc
• Period for which benefit can be available
• Risks associated


IP value capture
• Sometimes, the IP value is not separately
calculated and is instead indirectly factored in
the business, i.e.
– In overall cash flow
– In revenue
– In profits
– As higher multiples compared to other companies
without this IP


IP Licensing *
• Intellectual property – ie valuable intellectual
property must be owned by one party
• A license is a consent by the owner of the IP
to allow the use of the IP in exchange for
something in cash or kind
• Licenses can have different rights, ie to use,
to sell products based on a technology etc.
* Source: Successful Technology Licensing: IP Asset
Management Series, World Intellectual Property
Organization


IP Licensing
• There is a business relationship in which
multiple agreements may be involved
• An agreement is to be reached on multiple
parameters


Key items
• Subject matter
– Product, software programme, formulation,
document, set of diagrams etc.
– Sometimes there is a lack of clarity
– It is important to understand and define what
technology is, what the IP is and what is proposed to
be licenced


Key items
• Is item being licensed, completed?
– Questions are to be raised re stage of development of
IP, ie whether software has been completely written,
whether additional customisation is required, whether a
technique has been completely developed etc
– If more work is required, it is to be determined whether
the technology is usable in the incomplete form, what
additional work is required, what tests need to be
passed etc.
– Based on this, the value will be debated upon and the
price for transfer will be negotiated


Key items
• Who owns IP
– Is the licensor the owner
– The agreement should specify ownership,
particularly in joint venture situations. In such
cases, different nationalities may also be involved
• Can the technology be seen in advance
– Non disclosure agreements may be signed in such
cases, including place for settlement of disputes, if
any
– Information sharing and practical reality are to be
balanced


Key items
• Specific rights
– What are the rights being transferred
– What is not available
– Is what is offered, sufficient for the purpose for
which it is obtained
– Are any additional rights required for your business
– What else is relevant to usage of the IP, such as
training, knowledge of updates and changes, major
findings post agreement which will impact IP etc.


Key items
• What is the territory of rights
– Is this worldwide or limited to country, region
– Can it be distributed on the internet, in digital form
– Is there exclusivity
• To limit exclusivity, one may limit to dependency on
minimum royalty
• Exclusivity time and term of agreement need not be same
• This may be limited to some technologies, ie “field of use”


Key items
• Value and pricing
– Depend on nature of license, whether to
manufacture, market, purchase, joint venture etc
– From licensee perspective, affordability, other
costs, price to be charged for product and market
assessment play a key role
– From Licensor perspective, amount that will give
return on investment in R&D to be carefully
computed and understood


Key items
• Value and pricing
– Valuation methods are used to assist licensor and
licensee in making judgements on pricing
– Several methods exist, but they are subjective and may
sometimes be combined
– Three classic methods are cost based, income based
(most charge between 0.5% to 5% of revenues – thumb
rule, not to be considered rigidly)
– Comparables method, can be particularly difficult to
compare IP & technologies, but can be attempted)


Key items
• Payment method and terms
– Royalties and lump sum payments or a
combination of the two are commonly used
– May be on gross or net revenues, good to get into
details
– Licensee may want a cap on the royalty, but
licensor may not appreciate this
– Licensor may want a cap on the royalty, but
Licensee may not appreciate this
– Lump sum payments may be treated as advance
payments or part advance payments


Key items
• Terms may include performance warranties,
indemnities, representations
• May impact final price of products
• Future products and versions are to be
considered
• Other terms include documentation, consulting,
training etc, which form a key part of the IP
transfer/use


Agenda

Background

Valuation methods



Summary


CASES: Case discussion methodology

• Individual thinking – 3-5 minutes
– ( no discussions at this point .. No outsourcing your
thinking …  )
• Group discussion – 10-15 minutes
– Must have a consensus on key points; the team view is
to be arrived at.. Not the individual view

• Joint case discussion with all groups, lead by
faculty (30-45 minutes; can go on for more
depending on depth of detailing and learning
required from session)
• Summarising of learnings from case and linking it
to points made in session and additional points


Case 1
• Your company in India has generated patents which
are being used in product development in one
country
• Your markets are global, current customers of the
product are in three countries
• You are in turn paying a fee to the parent company
for use of certain software products, for which
purchase is made centrally at the head office
overseas.

Q. How will you look at the value of the IP generated in
your company
Q. What are the various other issues that you would
need to factor in, in addition to valuation?


Case 2
• A University has developed a technique that they
have patented
• They are considering creating a new start-up
company, to which the patent can be transferred
for commercilization
• They want the inventors and the University to
benefit from this

Q. If you are an advisor to the University, what are
the issues you will need to consider?
Q. What process will you ask the University to
follow?


Case 3
• A company has developed a set of software
products
• The founders of the company do not see eye-to-
eye in future growth plans of the business
• They decide to take legal steps to split the
company into two, with the existing two Directors,
each taking one unit
• The product lines are then split into the two
companies
Q. How will you look at the value of the IP
generated
Q. How will the value of the two companies factor
this


Agenda

Background

Valuation methods



Summary


In summary
• Understand the need/benefit/rational for
calculation of the IP
• Apply the different methods of valuation, i.e.
income, cost, transaction etc.
• Factor in the legal, accounting, tax and any
other matters while arriving at a value range
• For the negotiations, articulate various
elements such as IP ownership, royalty,
license fee, equity/debt mix, costs, billings,
payouts, earnings etc. and factor these in


APPENDIX:Net present value

t n
CFt
Value t
t 1 (1 r )

CFn is indicative of earning at a point in time
r is the discount rate


APPENDIX:CAPM
CAPM model is widely used to calculate cost of
equity capital
• Cost of equity =
Risk free rate + the risk of the company (beta) x
the market risk premium
• Market risk premium =
Market rate – risk free rate


Our professional approach is unique
VentureBean adds value to clients through…
Expertise
• Strategic and transformation capability - combined with expertise in
operational implementation
• Knowledge of local business conditions - combined with global best
practices
• Structured approach - ex 6 Sigma and Lean methodologies

Working style
• Entrepreneurship and Independence in working style – across levels in the
organization
• Change management is an important part of the work – we work together
with the client

Business Setup
• Team scalability – expertise across business functions
• Innovative business models / frameworks
…across multiple industry verticals
Consumer / Retail IT/IT enabled Travel &
Banking / Finance Manufacturing Education Healthcare
/ Food services Transportation


Our expertise within various areas…..
Cross Planning, Change •Strategies for business growth
•Governance
functional Management, •Change Management
•Project and Program Management
expertise Integration •Business and operational Due Diligence

•Channel strategies
Sales and marketing •Product portfolio Management, and Product Extension
effectiveness •Value Chain Mapping
•Customer analysis, segmentation and loyalty programs

•Lean process engineering methods
Operation •Gap-analysis
•Customer focused processes

Organizational •Performance Management
Functional Development / •Key talent & change management
•Leadership development based on the Leadership Diamond ™
expertise Leadership / HR •Organization Structure for Excellence & Growth

•Strategy, Governance & organization
•Sourcing
IT •Architecture
•Project Management

•Cost / Overheads Reduction
•Cash-flow Management & Capital Structure Advisory
Finance •Project Evaluation & Risk Management
•Syndication-Debt & Equity

53

Thank You!


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