Monetizing Intellectual Assets as a Business Michael H. Baniak, Partner Chicago Office [email protected].

Monetizing Intellectual Assets as a Business Michael H. Baniak, PartnerChicago [email protected]

©2014 Seyfarth Shaw LLP 2

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

• Multiple ways in the current environment for generating revenue

• Internal resourcing

• External funding/resource/outsource


Current IP Trends

• 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?


Current Patent Marketplace

• Patents have become more valuable assets leading to more and not less focus, and litigation

• Significant 3rd 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


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


Options for External Monetization

• Sale

• Partnership or JV

• Debt

• New Business Models


Sales and Partnerships

Sale Partnership 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


Ecosystem of Patent Monetization


IP Collateralized Debt

• Short-term loans

• Interest rates around 10-15%

• Typically involve warrants

• Covenants

• Limited ability to enforce IP

• Strict maintenance obligations


New Business Models

Industry consortiums

Work with industry groups pooling

funds to collectively purchase IP

Exchanges

Contribute portfolio to

create tradable license rights

Future Innovations?


Components of Intangible Assets/ Intellectual Capital

Intangible Value

Book Value

Intangible Assets Knowledge Capital

Intellectual Property

Market Value

Intellectual Assets


Key Intellectual Property Assets

• Patents• Copyrights• Trade Secrets• Know-how• Trade Marks/Names• Trade Dress


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


Measurable Components of Intangible Assets

• 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


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


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


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


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


“Extraction” Strategy Deployment

• 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


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


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


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


What’s Needed to License a Technology?

LicensableTechnology

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

People

• A technology champion • Prior business analyses from a business

and/or technology team• Scientists to give industry presentations• Technical publications supporting the concept


Impact of Stage of Development on Royalty Rates

0%

10%

20%

30%

40%

50%

60%

Lab Detailed Design Pilot / Prototype

Technology’s Stage of Development

Per

cen

t D

isc o

un

t t o

R

oy a

l ty

Rat

e f o

r F

ull y

Dev

elo

ped

Tec

hn

olo

gy

Discount Decreases as TechnologyMoves Closer to Fully Developed

Source: Stephen A. Degnan and Corwin Horton, “A Survey of Licensed Royalty Rates,” les Nouvelles, June 1997.


Licensing Process Overview

• 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


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


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



Critical Factors for Licensing Business SuccessRegardless 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


Critical Factors for Licensing Business SuccessRegardless 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


Critical Factors for Licensing Business SuccessRegardless 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


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


Thank You!

Michael H. BaniakSeyfarth Shaw LLP131 South Dearborn Street, Suite 2400Chicago, IL 60603Direct: (312) 460-5837Email: [email protected]

And with grateful thanks to Mike Dansky, Capstone Advisory Group

[email protected]

Monetizing Intellectual Assets as a Business Michael H. Baniak, Partner Chicago Office [email protected].

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