Expected value that preside an innovation

1. Determining the Value of Invention:
License Agreement
• Value – How much the licensor is entitled to as
compensation from the licensee in exchange for licensing
rights
• Compensation (Royalty) – Income for the licensor at the
expense of the licensee
• How to arrive at a fair royalty: Many Models
• Simple model to calculate impact on royalty rates and
compensation by fixed dollar payments have differing
effects on pricing behavior. (that doesn’t make sense,
stacy…)

2. Royalties
• Running Royalty is most popular. The sharing of
success, achieved through the distribution of profits –
This is considered a good indication:
– Profits: A share of 25% of profits
• Profit is not an ideal metric to base royalty payments
on because of the different accounting ways that can
be represented.
– Net Sales: A share of 5% of net sales

3. Royalty: % of Net Sales
(many models)
• % may be constant
• It might also decline beyond certain
base levels as sales rise (incentive to
licensee to promote sales)
• Increase at higher volumes

4. Royalty Rate Payment
• Often accomplished by up-front payment –
License Fee
• A minimum annual royalty payment
Up front money serves a few purposes:
• Immediate returns to licensor
• Incentive for licensee to bring technology to
market

5. Lump-sum Payment
Sometimes royalty payments are impractical
• A process
• The technology is a small part of a
complicated system

6. Other Compensation
1. Royalty fee for sub-licensees
2. Stocks
3. Equity (works for many small start-ups)
(2) and (3) allow licensor to participate in
profits and increased control of business

7. Ball Park Ranges
IP RANGE
Patent
Licenses
0.2 – 35%
Trade
Secrets
0.2 – 15%
Tabulated from biological, chemical, electrical,
mechanical

8. Fixed Sum Equivalents of Running
Royalty
• If the market interest rate is 10%, this is the
opportunity cost or rate that is forgone if the
licensor elects a running royalty
• Lump sum payments can be invested in the
market

9. Simple Model for
Negotiating Royalty
• An array of considerations or variables
judged to impact the royalty
• Reasonable estimates on dollar valuations of
the variables impacting the royalty
• Weights impacting relative worth on the
variables impacting royalty

10. Variable Affecting
Royalties
• Degree of Exclusivity (exclusive, non-
exclusive)
• Anticipated Net Sales
• Type of License (Patent or know how)
• Term of License
• Terms of Licensee (guarantees, immunities,
etc).

11. Summary –
Technology Transfer
• Innovation and Technology transfer is
exciting, but it is a complex process
• Innovation and Technology transfer are a
judicious mix of management and science,
creativity with technology.