2. Cost Method
Value of an asset is the cost to replace the
asset with an identical or equivalent asset
• Can take into account historical costs or current
costs to replace
Original R&D costs
Re-creation costs
Replacement costs
Design around costs
Issues
• When do you begin counting time dedicated to
project?
• How much research is funded by grants?
• Learning from mistakes
• Inflation and deflation in costs
3. Cost Method
Seemingly Easy to Seemingly Easy to
Calculate Calculate
Legal fees Preparation and
Application / registration prosecution costs /
and other fees patents
Personnel costs R&D Cost / patents
Development costs Preparation, prosecution
Production costs and R&D costs / patents
Marketing and advertising
costs
5. Cost Method
However, accounting standards are not well-
suited to determining costs of developing IP
Buying / developing research
No other intangible costs are broken out on the income
statement
R&D expenses are acceptable by investors and there
are tax credits associated with R&D expenditures
According to Booz Hamilton, only 15% of R&D
expenses go to research
The bottom line……cost does not equal value
Nuclear powered aircraft
Motorola Iridium satellite project
Cellophane wrappers for lettuce
Small percentage of patents have any value
whatsoever
6. Cost Method – Negotiating Considerations
Good for anchoring negotiations
Useful for make/buy decisions
Design around, the existence of a patent
increases design around costs
More information about patent reduces costs
Time to market
Assurance of reaching the market
Enhanced market position
7. Market Method
Build a Schedule of Similar Licensing Deals
License No. Revelancy Licensee Licensor Date of Royalty Royalty
No. Weighting License Rate (Low) Rate (High)
1 5 Corvero Networks Xbridge Software May, 2003 1% 5%
2 5 Marnetics Infotier.com October, 2002 5% 5%
3 5 Tech Laboratories Bernard Ciongoli et al. July, 2005 5% 5%
4 5 Link Plus Axiometric July, 2005 3% 2%
5 2 IXIA Netiq July, 2003 25% 50%
6 1 SWL Robert E. Pfister et al. October, 1993 16.5% 16.5%
7 1 Pegasus Solutions Global Enterprise Technology Ocober, 2000 20% 20%
8 1 Vicrev Technologies TA Technologies June, 2004 18% 18%
9 0 Falconstor Network-1 October, 2001 15% 20%
10 0 Acacia Patent Acquisition Telemate.net March, 2007 50% 50%
8. Market Method – Application Issues
Specific rights conveyed in transaction
Arms-length transaction
If no royalty is changed on intra-company transactions, the
IRS may deem a market rate; often, a low royalty rate is
applied to avoid this
Competitor vs. new market
Special financing terms available
Economic conditions at the time of the transaction
Date of the transaction
Inclusion of non-IP assets in transaction
Functional characteristics of the guideline IP
Stage of development of the IP
Economic characteristics of the guideline IP
Legal characteristics of the guideline IP
Large vs. small sale; prosecution history; inclusion of know-
how; distressed sale; lawsuit at baseline comparables
9. Income Method
Discount rate
Valuing the technology as part of a going concern -
lower discount rate
Valuing the technology as a discrete economic unit –
higher discount rate
DCF estimates are usually much higher than the results
from market comparables
Should use sensitivity analysis, scenarios and
probabilities
10. Strategic Value
Determine the strategic value your technology / patents
represent for the licensor / licensee
• Patents are most valuable when they cause consumers to buy
more of the product – PCs (replacement of a perfectly good
product); increased utility for existing or new user (features on
cell phones); when the patented feature is a primary factor in
the demand for the product, i.e. the patent is the product (velcro,
stickey notes)
• Impact on product portfolio
• Impact on manufacturing costs
• Royalty rate will vary depending on whether the licensee is a
competitor or is opening up a new market
• Ramifications of a license agreement with a major player on the
valuation or ability to receive funding by a smaller company
Depends on number of license
• Tool to use to obtain lower costs of supplies
• How renowned the inventor is – aka provenance
11. Strategic Value
Determine the strategic value your technology / patents
represent for the licensor / licensee
• Blocking power
• Next best alternative
• What are you selling into?
Standards setting bodies vs. Business methods
Battle – Broadcom vs. Qualcom
• Show licensee they can make more by paying a license
• A strong patent program indicates a successful R&D program
which is an indicator of corporate earnings power
• It is during the reduction to practice that many obstacles to
practical implementation are encountered, and the resulting
solutions are the source of many inventions. Honeywell
maintains a large engineering staff to help licensees implement
its patent technology.
• Patent value is a function of what the portfolio already has in it
12. The Initial Negotiations
Negotiating away from the table
Strengthening leverage before negotiations begin
Developing technology
Prototyping
Proof of principle experimentation
Data acquisition
Third-party validation
13. The Initial Negotiations
Strengthening leverage before negotiations begin
Securing a customer or financing
Learning about the decision making of the other side
Motivations of other sides – business and personal
Accounting considerations
Royalties – paid out of cost of goods sold vs. upfront fees
can be amortized over the life of the IP
Are decisions made at the business level vs.
centralized
Locating an internal champion
14. Opening the Negotiations
Using intermediaries
Leverage their relationships
A form of validation
More familiar with preparing documents
Who speaks first
Can poke holes in the other side’s opening
If you disagree, don’t let them continue uninterrupted
Risks of baiting impulsive behavior
Pie-in-the-sky technology
15. Opening the Negotiations
When negotiating against a machine, lubricate the
machine
Get your story straight – strong patent (opinion letter), financial
models, independent validation
Understand timelines and roles of players
Know how the other side works
Always be hard on the problem but soft on the people
16. Early Stages of Negotiations
NDA
Difficult to obtain
May already pursue technology, idea might be in the public
domain, someone else may approach them with the idea
Classify invention as a trade secret, to get two causes of actions
if there is a violation
Breach of contract and misappropriation of a trade secret
Bringing a Lawyer
Form of legal validation
Threats
Modulating of expectations
17. Early Stages of Negotiations
Memorandum of Understanding / Letter of Intent
Binding is questionable
Gating mechanism
Reduced impact of changes in players on the other side, puts
negotiations on a track
Jeopardize agreement
Could handicap your own negotiating strategy
Potential licensees can pay for an option to have a first
look at the technology
Pay filing fees
18. Licensing Check List
Do you own the intellectual assets?
Do you have the rights to license or sublicense?
Do you have the right to practice?
Do you suspect infringement? [if so, licensing strategy
will be very different]
What prior obligations/encumbrances exist that stand in
the way of licensing?
What is the status of the patents and pending cases in
all jurisdictions?
19. Licensing Check List
Identify and inventory all the supporting intellectual
property
Know-how, trade secrets, trademarks, research
reports, etc.
What other technologies do you own that are related or
linked to this technology
What rights are you licensing?
What rights and/or assets do you want to keep out of the
offering?
Is technology cleared by regulatory authorities?
What samples are available?
Compare against the next best alternative?
20. Licensing Check List
What are the potential market segments (fields-of-use)
What are the value drivers in the market?
What are the benefits (quantify)?
What is the value chain in the industry
Who are the high value licensee prospects?
What other assets can be included to add more value to
the offering
What are the strengths, weaknesses, opportunities,
threats from licensing to others
What is the value of the technology
Value created in the market (licensee)
Value share for your company (licensor)
21. Licensing Specific Issues
Research Development
Licensee pays licensor to develop
Cost vs. cost-plus
Penalties for non-performance
No more milestones
Lose window of opportunity for product
Licensor pays licensee to develop
Penalties for non-performance
Late payment penalties
Reclaim product and their data
Step-Up Royalty Rates
Good for licensees who have high initial capital costs
Can be matched with requirements that certain expenditures will
be made by licensee
22. Licensing Specific Issues
Step-Down Royalty Rates
Suitable when licensee has manageable initial capital costs
Incentivize licensee to scale operations
Minimum Royalties
Licensee is incentivized to commercialize
Licensee is disincentivized to design around
Royalty Stacking
Licensee can reduce its royalty payments to licensor by a
percentage of its future royalty obligations
There are usually floors
Can be applied to other stipulations in the license agreement
such as milestone payments
23. Licensing Specific Issues
Sublicenses
Veto rights
More opportunities to collect royalties
Sometimes primary licensee does not pay a royalty itself but
rather contracts with derivative licensees
These third generation licensees should be covered by royalty audits
Selling to distributors – lower prices than end customer will pay
Most favored nation license
Licensee only pays lowest current royalties or no future
licensees will be granted lower royalty rates
Risk of anti-trust challenge
24. Licensing Specific Issues
Fields of use
In early stages
Harder to split fields of use because licensee’s investment is
too big
Licensee wants sufficient room to experiment
Licensee will want full fields of use, not want full disclosure
because there could be less lucrative solutions that will
destroy the pricing power of a lucrative market
Licensors must be careful that they don’t do quick deals too
early because they need the money; they might license to a
company that will introduce a product at an inexpensive
price; could destroy the pricing power of a large market
segment (in medicine – same dosings, same formulation,
same administration is a problem) and therefore lose a
lucrative licensing opportunity
25. Licensing Specific Issues
Fields of use
Licensor could diversify its risks by having many fields of use
licenses
Licensor could negotiate for higher royalties on subsequent
licenses if initial licensees prove technology
Broad, then retractable
Narrow, then right of first refusal
Litigation
Non-exclusive licensees
Have no standing to sue
Exclusive licensee insists on right to defend
Usually have more resources
Licensor insists on right to defend
26. Licensing Specific Issues
Cross-licensing
Benefits
Less risk of litigation
Less R&D costs since there is less work-around
Barriers to entry for new competitors
Concerns
Give competitors access to your IP
Harder to assert later – not standing on right to exclude –
harder to receive an injunction
28. Licensing Specific Issues
Have-made rights
Right to sub-contract for the manufacture of the product
Product liability issues
Right to inspect vs. requiring licensee to adhere to standards
Change of control
Tight control of volume of production
Handling of disposability of defective products, excess
materials
Trade secrets
Improvements are made after patent filings, licensees
want this information
29. Licensing Specific Issues
Combining licenses with consulting agreements
Assignee can become more active in commercializing the
technology
Can include confidentiality
Know-how can’t be found to be invalid – possible anti-trust
issues when the know-how becomes widely known
Issue – one licensing rate or two
New technology – Development Agreement, new entity
Defense against MedImmune
Duration of licensing agreement
Extending – perpetual license based on pending patents, foreign
patents or weak patents with lots of time remaining
Terminating – notification; 8 years from filing or 5 years from first
sale
30. Licensing Specific Issues
Consider the Possibility that the Licensee will file for
Bankruptcy Protection
Write in “license will terminate if the licensee files for bankruptcy
protection”
This may not be enforceable due to the IPSO FACTO rule
However, licensors want to be the squeaky wheel
Licensor should receive consideration in return for granting
consent for the assignment of its license if the licensee goes into
bankruptcy
Licensor should be aware of res judicata – must object when
bankruptcy court is moving in an director adverse to the
licensor’s interests
31. Compliance
Compliance issues should be considered during the
negotiating, not as an afterthought
Royalty audits
Audits should be conducted early in the relationship
Disputes should be addressed within the framework of regular
meetings
Calculation of royalties should conform to licensees
accounting practices
Surveys and self audits are intermediate steps
Usually work on commissions
Letters should be sent out immediately after audit comes
back – shows you believe in audit, deprives licensee of
excuse to delay payment
32. Compliance
Royalty Audits
Some companies are sloppy in their payouts
You might owe the other side money
Local laws may inhibit discovery
Royalty audit included with accounting audit
Less aggressive, maybe management wants it that way
33. Contact Information
David Wanetick
Managing Director
IncreMental Advantage
dwanetick@incrementaladvantage.com
