Valuing Intellectual Property

Innovation Catalyst™ Seminar


Valuing Technology Based Intellectual Property

An Innovation Catalyst™ Seminar

Prepared and Presented by Marcus TarrantManaging DirectorMission HQ Pty. Ltd. ATF the Innovate Trust


© Mission HQ Pty. Ltd. All Rights Reserved2Innovation Catalyst™ Seminar

Contact Details

Marcus TarrantManaging DirectorMission HQ Pty. Ltd. ATF the Innovate [email protected]+61 3 9005 9710www.missionhq.com.au

Guest PresenterMatthew BowlerIP Valuation Pty. [email protected]

mailto:[email protected]

http://www.missionhq.com.au/

mailto:[email protected]



Copyright ©2010 Mission HQ.

The content, format, structure and communication technique utilised in this document are the intellectual property of Mission HQ Pty. Ltd.

This document is strictly classified as “Commercial in Confidence” and intended only for recipients expressly authorised by Mission HQ. Any modification or distribution under altered expression, by any means, in its entirety or in parts, to any person without written approval from Mission HQ is expressly prohibited.

Natural Persons or bodies corporate may not copy, retransmit, distribute, publish or otherwise transfer any copyrighted material to third parties or contractors without the express permission of Mission HQ.

This document is intended to reflect MISSION HQ’s high-level overview of the IP Valuation Process. It does not constitute formal professional advice or a recommendation to potential licensors, tax advisors, inventors or other third parties as to a course of action in respect of the processes addressed, and should not be relied on as such. All care is taken in the preparation of this document but MISSION HQ bears no responsibility as to the contents of this document and disclaims any liability with respect to its use or misuse.

Intellectual Property & Disclaimer


4Innovation Catalyst™ Seminar

Seminar Agenda

© Mission HQ Pty. Ltd. All Rights Reserved

Agenda Item TimeIntroduction 10 mins

The Top 6 Valuation Mistakes 10 Mins

What are intangible assets 20Mins

Conducting a valuation 20 Mins

The deliverables that comprise a valuation 10 Mins

Running an example through the model “Ballast Blaster Case Study” 30 Mins

Facilitated discussion 15 Mins



Some Quotes

“IP Valuation isn’t rocket science, its much more difficult.”

Unknown

“Valuation is in many ways simply the quantification of business strategy, strategic planning frameworks and execution capability”

Marcus Tarrant



About Mission HQ Pty. Ltd.

Some recent past clients of Mission HQ and the team:

http://www.commerce.wa.gov.au/

http://www.audinate.com/index.php

http://www.reh-plc.com/default.asp



Mission HQ staff track record in IP Valuation

• For litigation purposes (Software Technology)– Established foundation valuation for Arbitration

• For M&A activity (Mining Technology)– Movement of IP from entity in administration

• For IP warchest (Telecommunications)– International IP transaction facilitated

• For Investment Purposes (Clean Energy)– $50m investment by Aust ASX co in UK Aim listed entity

• For Tax Purposes (Clean Energy)– Manage transfer pricing impacts of shifting IP to overseas entity

• For project selection (Optical Communications)– $1.5m in additional funding provided to accelerate development

• For Grants applications (Materials)– Successful grant application

• For IP Assertion Programmes (Biotech)– Enabled investment into Assertion programmes



How can we help?

• Running IP surfacing workshops• Running workshops to structure the creation of

alternate business models for valuation purposes• Building valuation financial models• Advising on or supporting your valuation process• Conducting complete IP valuations• Facilitating IP transactions



Top 6 Valuation Mistakes

1 – Thinking that value is a well-defined and well-understood term.

2 – the value of an intangible is equal to the price someone is willing to pay.

3 – value is equal to the cost of creating an item.

4 – there should be only one accepted method for valuing intangibles.

5 – patents cannot be valued credibly because each one is unique.

6 – The value of a company’s intangibles is the difference between its market value and the value of its tangible assets.



What is value? – Whiteboard Discussion

• What are some of the characteristics of Value?– Value is Dynamic



Is Value equal to the price someone is willing to pay

• Discussion



Is Value is equal to the cost of creating an item

• Discussion



Summary - Characteristics of value

• Value is not– Consistent– Stable– Easily predictable

• Value is– Dependent on other factors– Context is critical– Dynamic



Introducing a new perspective



What justifies the price difference?

$220 $19.95



A cost approach

Tangible Cost•Leather•Plastics•Production costs•Marketing costs•Labour•Logistics and Distribution

Tangible Cost•Canvas•Plastics•Production costs•Marketing costs•Labour•Logistics and Distribution



An intangible asset approach

Nike TrademarkNike Air Patents No 12345345No 347654321

Trade Secret on sole bonding

Design registration on sole

Production technique for bonded plasticsPatent: 9897134

Distribution model



Intangible asset valuation

Production technique for bonded plasticsPatent: 9897134

$ Valuation

http://www.shoxsport.com/womens-shoes/wholesale-womens-nike-shoes.jpg



Production Finance

Marketing

Legal

Intangible Assets another dimension

Intangible assets provide a new way of looking at your organisation



Lets start by thinking broadly



patented technologies

trade marks

designs

copyright

databases

trade secrets

key skills

know-how

processes

market data

information

un-recorded inventions

data

business relationships

licenses

branding

reputation

human resources

intellectual assets (IA)

intellectual property (IP)

intellectual capital (IC)

what are intangible assets?What are intangible assets?

Intangible Assets



Skandia Concept of Intangible AssetsMarket Value

Financial Capitalvalue of all physical and monetary assets

Intellectual Capital

Human Capital‘thinking’• competence (knowledge and skills)• attitude (motivation, behaviour, conduct)• intellectual agility (innovation, imitation, adaptation)

Structural Capital‘non-thinking’

Customer (Relationship) Capitalcustomers, suppliers, shareholders, alliance partners, other stakeholders

Organisational Capital• infrastructure• processes• culture

Innovation Capitalrenewal and development value

Process Capital

Intellectual Property Intangible Assets



Adam and Oleksak Concept of Intellectual Capital

Market Value

Intellectual CapitalFinancial Capital

Human Capital

Structural Capital

Relationship Capital

Business Model

Management

Employees Processes

Intellectual Property

Customers

Brand

Network



Human Capital

• This indicates tacit knowledge, skills, abilities and experience embedded in individuals within an organization.

• intellectual agility for adaptation, innovation and cross-fertilisation.



Structural Capital

• knowledge and rules embedded within organizational routines, including – mechanisms and structures of the organization, – assets linked to methodologies, – technologies and processes, – licenses, – patents, – trademarks, – research and development strength, – architectural competencies which enable a firm to

integrate component competencies in new and flexible ways



Relational Capital

• This involves every existing business network linking an organisation to partners (distributors, suppliers and alliance associates) – at higher and lower regions of its value stream; – corporate image and perceptible reputation; – building blocks of customer base, – customer loyalty,– market connectivity.



Business Model

• This consists of competitive ability, extent of market control, knack for business development and rationality of strategy.

• Covered in further detail later in this presentation.



Aspects of Valuation

IP for Valuatio

n

Elements of

ValueActor

Business Enterprise

Working Capital

Fixed Assets

Intellectual Assets

Intellectual Property

PatentsTrademarksCopyrights

Technological Know-how

DesignsFormulae

Trade Secrets



What constitutes Intellectual Property?



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Intellectual Property Foundations – what is IP?

• Intellectual property rights are the legal rights which result from creations of the mind (such as inventions, literary and artistic works, and symbols, names, images, and designs used in commerce).

• IP rights can be broadly categorised into two groups: IP rights which are registerable and those which are not.



Forms of IP

• Copyright – applies to original works or art, literature, music, films broadcasts and computer

programs• Patents

– apply to any device, substance method or process which is new, inventive and useful• Plant Breeders Rights

– applies to registered plant varieties• Confidential information

– applies to any information that is demonstrably kept confidential• Registered Designs

– applies to features of shape, configuration, pattern or ornamentation which gives a product a unique appearance

• Circuit Layout Rights – apply to layout designs for integrated circuits and computer chips

• Trademarks– apply to a word, phrases, letter, number sound smell shape, logo or picture that

distinguishes good and services from another



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Intellectual Property Foundations

• Patents

– A patent is a right granted for any device, substance, method or process, which is new, inventive and useful.

– Patents do not protect artistic creations, mathematical models, plans, schemes or other purely mental processes.

– A patent gives the owner the exclusive right to prevent others from exploiting the invention the subject of the patent.

– The term of an Australian standard patent is 20 years.



Conducting an IP Valuation



The IP Valuation Pyramid

Deliverable

Cost Income Transaction Option

Legal Business Financial

Purpose Description Premise StandardFoundation Layer

Profile Layer

Methodology Layer

Solution Layer



Foundation Layer - Purpose

• Why are we valuing the asset?– Helps to set the goals and objectives for the valuation

Transaction – M&A / Licensing

Financial Reporting Bankruptcy / Reorganization

Audience: Management Investors

Standards: Company Specific

Audience: Investors SEC

Standards: IAS 38 FASB 142 & 157 AASB 138

Audience: Bankruptcy Judge Creditors

Standards: Statute / Case law Bank requirements

Tax Legal Financing / Securitization

Audience: ATO, Foreign Tax Authority

Standards: Per Tax Code (§§ 367; 482; 350;197; 170)

Audience: Trial court

Standards: Statute / Case law

Audience: Creditors Investors

Standards: Statute/ Case law



Foundation Layer – Description (1)

• What is the asset?– Form of intellectual

asset(s)– Inter-relationship

between intellectual assets

– Remaining asset life– Strength of protection

assessment

Patents Legal Attribute Valuation ImpactScope - Number of Claim Elements More elements means it’s easier to substitute pieces

of the puzzle and “design around” the invention

Time left before 20 year rights expire

Patents lose value as time elapses

Patent grants owner the right to Make, Use, or Sell (& Import if a process)

Allows carving out different parts of value chains in one market

Continuation Strategy Presence of a continuation strategy can extend the scope and time of the parent patent (“evergreening”)

Accused infringer has been sent a cease and desist letter

Willful (treble) damages may accrue when notice is received

Value chain position of accused infringer

More downstream may mean greater damages (value added of offering is greater)

Patenting of multiple patent forms (machines, processes, compounds, products)

Multiple forms increases licensing opportunity and defensive position

P Characteristics & Valuation



Foundation Layer – Description (2)P Characteristics & Valuation

Trade Secrets Legal Attribute

Valuation Impact

Last as long as it remains secret

Value may change over time (e.g. Coca-Cola formula)

Reasonable efforts to maintain secrecy

Necessary for protection

Protection contracts Presence secures trade secret status

Reverse engineering & Independent derivation

Allowed; What are probabilities of occurring?

Complexity Limits probability of independent derivation

Copyrights Legal Attribute

Valuation Impact

Life of author + 70 years duration

Value may increase or stay constant over a long period (e.g. Disney animations).

Right to copy, perform, distribute, publish

Allows different value chains to be segmented

Can be reverse engineered

In the case of software. What is the probability?



Foundation Layer – Premise (1)

• How will the asset be used?– This is often the most complex component of establishing the

valuation foundations• 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)

– Requires development of a business model to better understand how the technology will be exploited and what revenues may be attributable.



Foundation Layer – Premise (2)

• Not to just value the technology on the current business model.

• We look at any potential business models that the client is free to pursue given IP encumbrances



The 9 Element business model Matrix



The business model matrix

1. Value Proposition – What are you offering? 2. Capabilities/Resources – What skills and

capacity do you require?3. Partnership – Who do you need to work with?4. Activities – What will you do?5. Costs – What are your significant costs likely to

be?6. Relationship – What formal and informal

relationships are required7. Channel – What are our channels to market?8. Revenues – What will our customers pay for?9. Customers – Who are our customers?



1. The Value Proposition



Defining the value proposition

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Evaluation Process

Value Co-Creation

Purchase Process

Set-up/ Installation

Use/ Operation

Complement.product/ services

Maintenance & After sales Ending Value

and Value Transfer

• Value can occur in any of the following elements



Mapping out your value proposition

Evaluation Process

Value Co-Creation

Purchase Process

Set-up/ Installation

Use/ Operation

Complem. products

Maint./ after sales

Ending/ Value transfer

Increasing customer productivity

Simplicity for customer

Convenience for customer

Reducing Customer Risk

Impact on Customer’s Image

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Evaluation Process• Simplify a customer’s

evaluation process

• Example: ISELECT



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Value Co-Creation• Through various

technological advances the integration and participation of the customer in the value creation process is increasingly possible.

• Together with the knowledge and networks of customers additional value can be created and facilitated.

• Examples: Ebay & Amazon



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Purchasing Process

• Customers highly value an efficient, simple and convenient purchase process.Example: Creative Mobile Technologies back-seat swipe and entertainment for Taxi Cabs



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Set-Up/Installation

• In some cases set-up or installation is necessary. The simplification of this process is of enormous value to the customer.

• Example: Dick Smith: Mobile Techxphert Services



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Use/Operation• In many cases most of the

value in a value proposition comes from the use or operation of an actual product or service. However, to differentiate themselves companies try to create value beyond a simple product or service.

• Salesforce is carefully creating additional value by offering continuous updating "behind the scenes" and providing easy access to complementary products by third party vendors.



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Maintenance & aftersales support

• Value is often created during the maintenance and after-sales phase. This can be either by offering high quality service or by offering a value proposition that minimizes the need for maintenance & after-sales.

• Example: The attractiveness of salesforce.com’s value proposition essentially comes from the fact that the hosted software model (application service provider - ASP) minimizes the need of software maintenance by the customer.



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Ending and value transfer

• In many cases once a customer does not need a product or service anymore he has to terminate the service or dispose of the product.Example: BMW Recycling Programme



2. Capabilities/Resources



2. Capabilities/Resources

• What physical assets does our business model require?– Factory– Machinery– Etc.

• Intellectual Assets– Trademarks (licensed or owned)– Patents– Processes– Systems

• Human Resources– Skills– Team structures

• Financial– Access to finance



3. Partnerships

• Describes the network of suppliers and partners that will make the business model work– Joint Ventures– Strategic Alliances– License agreements– Service agreements– Outsourcing arrangements



4. Activities

• The activities outline the most important things that the organisation will do.– Production– Problem Solving– Platform management– License management



5. Costs

• Outlines the primary areas of cost under the business model– Fixed Costs– Variable Costs– Economies of scale– Key cost rachet points



6. Relationships

• What relationships other than partnerships may be required.– Particularly relevant in web 2.0 companies, where a

customer has data vested with the company.



7. Channel

• What channels to market with the model employ?



8. Revenue

• What element of our value proposition will our customers actually pay for?– Asset Sales– Usage fees– Subscription– Advertising revenue– Renting or leasing– Licensing– Financing



9. Customers

• The different groups of people or organisation that the organisation hopes to reach and serve.

• Segmenting requires:– Distinct groups and value segments



Foundation Layer – Value Standard (1)

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



Foundation Layer – Value Standard (2)

• Preferred standard is fair market value

• Who will be the assumed buyer of the asset?– Represents how value is tied back to the

valuation purpose.– Fair market value is the most common

standard adopted in both legal and accounting frameworks

– Accounting standard on Fair Market Value FASB 157



Profile Layer – Legal Profile

• Legal opportunities dictating the scope and limitations of the asset.– Commercialisation agreements– License agreements– Asset control– Encumbrances– Legal scope of protection

• Breadth of claims• Geographical coverage• Market coverage• Scope for monopolistic recourse• IP landscape/Freedom To Operate



Profile Layer – Business Profile

• Business issues dictating the scope and limitations of the asset.

– Refers to the specific characteristics of the commercialising entity

– Surrounding intellectual assets and intellectual capital that will work to support or detract from the core asset value

– Capacity to bundle with other intellectual assets

– Capacity to get the technology to market through existing relationships and processes

– Product support and complementary technologies

– Porter’s 5 forces model provides a useful framework for assessing the impact of the business profile on valuation



Profile Layer – Financial Profile (1)

• Financial issues dictating the scope and limitations of the asset.– Projected revenues, costs and capital requirements

associated with commercialising the asset– Estimated time to commercialise the asset– Estimated cost of non-infringing alternatives– Cost of capital associated with the asset (Discount Rate)– Financial capacity to commercialise– Requires the construction of a financial model









Methodology Layer

• There are 4 primary valuation methods:– Transactional– Cost– Income– Binomial/Option



Methodology Layer - Transactional

• Represents a recent price paid for similar intangible assets under similar circumstances

• Review recent, relevant transaction information– Listed entities are the best– Proprietary transactional databases– License transaction journals and information

• Transaction data can never be ignored as part of a valuation exercise, it must be review and its relevance to your valuation either accepted or denied.

• Typically involves two steps, screening and adjustment



Methodology Layer - Cost

• Assumes that the current replacement cost to develop is a good proxy for the value of the asset– Look at the cost to design around a patent or patent

family– A particularly useful approach when legal protection is

weak, ie. How much would it cost a potential licensee to re-create or work around

– This method should not be confused with Historical cost or accounting cost

– This method is generally not used for assets that have been granted a monopoly



Methodology Layer - Income

• Values the asset on a best estimate of its ability to generate future cash flows

• Has 3 primary components– Economic Life (i.e.. Patent life)– Projected Cashflows– Discount rate

• DCF (Discounted Cashflow) is a foundation of the income method

• Other analytical factors should influence your discount rate.• A terminal value, beyond the economic life of the asset may

be applicable (e.g.. Panadol)• Must cater for both direct and indirect cost and income• Requires detailed financial modelling by month and year• Generally the most applicable when valuing technology



Methodology Layer - Binomial/Options

• Takes into account future, contingent events• Methods were originally developed for pricing of

stock options– real options,

• Assumes that value increases as the level of uncertainty decreases

• Most useful for highly capital intensive activity with a high degree of uncertainty

– binomial options • Otherwise known as decision tree analysis• The impact of alternate pathways is explored and modelled.

– Montecarlo simulations.• Models a low probability of pay off across a large number of

potential iterations



Choosing the appropriate methodology

PRIMARY SECONDARY WEAKPatents and Technology Income Market Cost

Trademarks and Brands Income Market Cost

Copyrights Income Market Cost

Assembled Workforce Cost Income Market

Management Information Software Cost Market Income

Product Software Income Market Cost

Distribution Networks Cost Income Market

Core Deposits Income Market Cost

Customer Relationships Cost Income Market

Franchise Rights Income Market Cost

Corporate Practices and Procedures Cost Income Market

Elements of a Going Concern Cost Income Market

Goodwill Market (1) Income (2) -

(1) Residual based on enterprise market value(2) Capitalization of "excess" income



The solution

• Deliverables include:– Valuation document– Scenario analysis– Financial model– Statement of Value



How can we help?

• Running IP surfacing workshops• Running workshops to structure the creation of

alternate business models for valuation purposes• Building valuation financial models• Advising on or supporting your valuation process• Conducting complete IP valuations• Facilitating IP transactions

• Thank you for your attendance