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IP valuation

IP Valuation methods, key points to be considered, practical perspectives in pricing, cases for discussion

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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?




VentureBean Consulting Private Limited          4
Why Value
   To
   • Purchase
   • Sell
   • Plan for the future
   • Report
   • Evaluate value of work in progress
   • Take decisions




VentureBean Consulting Private Limited    5
Agenda

 Background

 Valuation methods

 Practical perspectives: In pricing

 Cases for discussion

 Summary

VentureBean Consulting Private Limited   6   6

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IP valuation

  • 1. IP Valuation @ IIMB, 14th December 2012 Anjana Vivek anjana@venturebean.com
  • 2. Agenda Background Valuation methods Practical perspectives: In pricing Cases for discussion Summary VentureBean Consulting Private Limited 2 2
  • 3. 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
  • 4. Why Value When do you think IP is to be valued? VentureBean Consulting Private Limited 4
  • 5. Why Value To • Purchase • Sell • Plan for the future • Report • Evaluate value of work in progress • Take decisions VentureBean Consulting Private Limited 5
  • 6. Agenda Background Valuation methods Practical perspectives: In pricing Cases for discussion Summary VentureBean Consulting Private Limited 6 6
  • 7. Valuation methods These can be broadly classified into: • Cost based • Income based • Market based • Special: qualitative based; other • Contingent claim (options) VentureBean Consulting Private Limited 7
  • 8. Valuation methods • Different experts have different classifications of the various methods of valuation • Within these methods, there are sub-methods • Sometimes the methods overlap VentureBean Consulting Private Limited 8
  • 9. Valuation process • Review and selection of the method(s) of valuation • Understanding of issues which impact valuation • Special situations and their impact on valuation VentureBean Consulting Private Limited 9
  • 10. 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) VentureBean Consulting Private Limited 10
  • 11. 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 VentureBean Consulting Private Limited 11
  • 12. 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 VentureBean Consulting Private Limited 12
  • 13. 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 VentureBean Consulting Private Limited 13
  • 14. 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 VentureBean Consulting Private Limited 14
  • 15. 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. VentureBean Consulting Private Limited 15
  • 16. Valuation – Market price Challenges and Issues • 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) VentureBean Consulting Private Limited 16
  • 17. 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) VentureBean Consulting Private Limited 17
  • 18. Valuation – Income based Challenges and Issues • 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 VentureBean Consulting Private Limited 18
  • 19. 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 VentureBean Consulting Private Limited 19
  • 20. Valuation – Qualitative Challenges and Issues • 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.. VentureBean Consulting Private Limited 20
  • 21. 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 VentureBean Consulting Private Limited 21
  • 22. Valuation: relief from payment Challenges and Issues • 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 VentureBean Consulting Private Limited 22
  • 23. 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) VentureBean Consulting Private Limited 23
  • 24. 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 VentureBean Consulting Private Limited 24
  • 25. 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 VentureBean Consulting Private Limited 25
  • 26. 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 VentureBean Consulting Private Limited 26
  • 27. Options Challenges and Issues • Assumption on variance are difficult to defend when options have long lifetimes • Value of underlying asset if not traded may be difficult to estimate VentureBean Consulting Private Limited 27
  • 28. Agenda Background Valuation methods Practical perspectives: In pricing Cases for discussion Summary VentureBean Consulting Private Limited 28 28
  • 29. 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 VentureBean Consulting Private Limited 29
  • 30. 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 VentureBean Consulting Private Limited 30
  • 31. 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 VentureBean Consulting Private Limited 31
  • 32. 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 VentureBean Consulting Private Limited 32
  • 33. IP Licensing • There is a business relationship in which multiple agreements may be involved • An agreement is to be reached on multiple parameters VentureBean Consulting Private Limited 33
  • 34. 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 VentureBean Consulting Private Limited 34
  • 35. 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 VentureBean Consulting Private Limited 35
  • 36. 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 VentureBean Consulting Private Limited 36
  • 37. 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. VentureBean Consulting Private Limited 37
  • 38. 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” VentureBean Consulting Private Limited 38
  • 39. 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 VentureBean Consulting Private Limited 39
  • 40. 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) VentureBean Consulting Private Limited 40
  • 41. 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 VentureBean Consulting Private Limited 41
  • 42. 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 VentureBean Consulting Private Limited 42
  • 43. Agenda Background Valuation methods Practical perspectives: In pricing Cases for discussion Summary VentureBean Consulting Private Limited 43 43
  • 44. 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 VentureBean Consulting Private Limited 44
  • 45. 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? VentureBean Consulting Private Limited 45
  • 46. 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? VentureBean Consulting Private Limited 46
  • 47. 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 VentureBean Consulting Private Limited 47
  • 48. Agenda Background Valuation methods Practical perspectives: In pricing Cases for discussion Summary VentureBean Consulting Private Limited 48 48
  • 49. 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 VentureBean Consulting Private Limited 49
  • 50. 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 VentureBean Consulting Private Limited 50
  • 51. 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 VentureBean Consulting Private Limited 51
  • 52. 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 VentureBean Consulting Private Limited 52
  • 53. 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 VentureBean Consulting Private Limited 53 53
  • 54. Thank You! VentureBean Consulting Private Limited 54