Valuing Intellectual Property

Valuing Technology Based Intellectual Property An Innovation Catalyst™ Seminar Prepared and Presented by Marcus Tarrant Managing Director Mission HQ Pty. Ltd. ATF the Innovate Trust

Contact Details Marcus Tarrant Managing Director Mission HQ Pty. Ltd. ATF the Innovate Trust Marcus.tarrant@missionhq.com.au +61 3 9005 9710 www.missionhq.com.au Guest Presenter Matthew Bowler IP Valuation Pty. Ltd. Matthew.bowler@ipvaluaton.com.au www.ipvaluation.com.au © Mission HQ Pty. Ltd. All Rights Reserved 2

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

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 © Mission HQ Pty. Ltd. All Rights Reserved 5

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 © Mission HQ Pty. Ltd. All Rights Reserved 7

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 © Mission HQ Pty. Ltd. All Rights Reserved 8

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. © Mission HQ Pty. Ltd. All Rights Reserved 9

Logistics and DistributionTangible Cost ,[object Object]

Logistics and Distribution,[object Object]

Intangible assets provide a new way of looking at your organisation Intangible Assets another dimension

what are intangible assets? Intangible Assets intellectual assets (IA) intellectual property (IP) intellectual capital (IC) 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 What are intangible assets?

Skandia Concept of Intangible Assets Market Value Financial Capital value of all physical and monetary assets Intellectual Capital Human Capital ‘thinking’ ,[object Object]

attitude (motivation, behaviour, conduct)

intellectual agility (innovation, imitation, adaptation)Structural Capital ‘non-thinking’ Organisational Capital ,[object Object]

cultureCustomer (Relationship) Capital customers, suppliers, shareholders, alliance partners, other stakeholders Innovation Capital renewal and development value Process Capital Intellectual Property Intangible Assets

Adam and Oleksak Concept of Intellectual Capital Market Value Intellectual Capital Financial Capital Human Capital Structural Capital Relationship Capital Business Model Management Intellectual Property Network Employees Processes Brand Customers

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.

-30- 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 registerableand 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 © Mission HQ Pty. Ltd. All Rights Reserved 31

-32- 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.

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 © Mission HQ Pty. Ltd. All Rights Reserved 36 P Characteristics & Valuation

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. © Mission HQ Pty. Ltd. All Rights Reserved 38

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 © Mission HQ Pty. Ltd. All Rights Reserved 39

The business model matrix © Mission HQ Pty. Ltd. All Rights Reserved 41 Value Proposition – What are you offering? Capabilities/Resources – What skills and capacity do you require? Partnership – Who do you need to work with? Activities – What will you do? Costs – What are your significant costs likely to be? Relationship – What formal and informal relationships are required Channel – What are our channels to market? Revenues – What will our customers pay for? Customers – Who are our customers?

Defining the value proposition -43- Value can occur in any of the following elements

Mapping out your value proposition -44-

-45- Evaluation Process Simplify a customer’s evaluation process Example: ISELECT

-46- 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

-47- Purchasing Process Customers highly value an efficient, simple and convenient purchase process.Example: Creative Mobile Technologies back-seat swipe and entertainment for Taxi Cabs

-48- 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

-49- 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. Salesforceis carefully creating additional value by offering continuous updating "behind the scenes" and providing easy access to complementary products by third party vendors.

-50- 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.

-51- 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 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 © Mission HQ Pty. Ltd. All Rights Reserved 53

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 © Mission HQ Pty. Ltd. All Rights Reserved 54

4. Activities The activities outline the most important things that the organisation will do. Production Problem Solving Platform management License management © Mission HQ Pty. Ltd. All Rights Reserved 55

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. © Mission HQ Pty. Ltd. All Rights Reserved 57

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 © Mission HQ Pty. Ltd. All Rights Reserved 59

9. Customers The different groups of people or organisation that the organisation hopes to reach and serve. Segmenting requires: Distinct groups and value segments © Mission HQ Pty. Ltd. All Rights Reserved 60

Foundation Layer – Value Standard (1) Fair Market Value Fair Value Market Value Investment Value Collateral Value Arm's-Length Standard Other Standards of Value © Mission HQ Pty. Ltd. All Rights Reserved 61

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 © Mission HQ Pty. Ltd. All Rights Reserved 62

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