What are some of the main factors that influence setting valuation for IP, and how do these parameters differ depending on whether the IP relates to an existing commercially available high value product, or to a product still under development?
Intellectual property (IP) generates a significant portion of corporate revenue across industries. Technical, business and legal information is critical for IP development, protection and commercialization. Creating and protecting new IP are a first crucial step in successful commercialization and for building and keeping competitive advantage. Effectively managing and optimizing the value of the patent portfolio is a major challenge for many firms, especially those in knowledge intensive industries, such as the pharmaceutical, biotechnological and chemical industry. For business development, e.g. licensing, it is important to assess the financial value of new IP. This can be done via simple methods using industrial standards or rules of thumb for a specific industrial sector, such as the “25 percent rule” or “FRAND”. More labor-intensive methods are based on discounted cash flow (DCF) techniques.
The following steps are commonly used for evaluation of IP
(i) Purpose and scope of the valuation.
(ii) Subject asset Definition
(iii) Premise, or basis, of value Identification.
(iv) Appropriate valuation approach selection
(v) Method of valuation selection
(vi) Validation of valuation assumptions
We invested a substantial amount of resources into new product development and along with that, we invested even more heavily in the IP to protect it. Unfortunately, even with utilizing a top Chicago law firm, we had much difficulty getting our patents broad enough to mean anything substantial. And then when we had a clear case of infringement, the jury wasnt smart enough to understand patent law, so we had difficulty defending our patents. So, even they IP is very costly to create, patent and defend, be careful how high you value it because based on real world scenarios, you can spend 7 figures to defend your IP and lose.
Thank you for responding to my question on IP valuation, from several weeks ago. I am new to Convetit and was initially hesitant about what the risk/benefit relationship for devoting time to this endeavor might be. Though I have not completely resolved that question at this time, I didn’t want to lose track of your effort in responding to my query.
So… let me pass along some of my thoughts. My question was aimed at defining some basic parameters driving IP valuation, for which there might be general agreement. I was looking for factors that would be considered relevant whether we are talking about selling or licensing IP. Some basic considerations I had in mind where whether the IP was formalized in invention disclosures, issued patents, patent applications, trade secrets, or trademarks, as examples. If issued patents, then what is/are the issue date(s). What do the claims look like – are there strong independent claims? What is the competitive IP landscape? Is there freedom to operate and does the IP attempt to build an effective “picket fence” around the desired field of use that precludes or restricts competitive entrance?
Admittedly, I’m just listing some of the useful “nuts and bolts”. I was primarily interested in how these factors might be weighed differently depending on whether the IP is controlled by a university, a start-up, or a commercially successful corporation. If the company is a start-up, then perhaps economics would not allow for any internal expansion of protected IP (continuation in parts for example) which might not be a significant hurdle for an established company. Economics of scale might also weigh if business entities operate in a regulated environment. Here I’m thinking about FDA and the costly and time consuming effort to gain regulatory approval for pharmaceutical agents and medical devices (my own background). No doubt, the question of royalties is certainly pertinent, but I hope you can see where I was coming from. Also, I have my own collection of hard luck stories re: how IP misadventures can be a real bummer. One in particular involves development of a robust patent portfolio for a medical device which ultimately was not approved by FDA.