Intellectual Property Valuation Case Study
Michael S. Blake, CFA, ASA, ABARDirector of Valuation Services
Sidebar by Howard Zandman, CPA/CFF, CFFAPartner, Dispute Resolution Services
Habif, Arogeti & Wynne, [email protected]
[email protected]@unblakeable
About HA&W
• Largest independent accounting firm in the Southeast, top 50 in U.S.
• 62 years old• 310 employees• Tax, Audit, Consulting (Valuation, Dispute
Resolution, M&A Due Diligence)• Based in Atlanta, global clients
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Don’t Stress Out about Finance
• If you understand that…– Money today is better than money in the future– Less risk is better than more risk– Investors/owners want higher returns relative to
risk
Then YOU can understand finance!
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Why Value Intellectual Property?
• Transaction• Bank Collateral• Financial Reporting• Tax Reporting and Compliance• Litigation
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Setting the Case Study Stage
• Startup Company with new 3D printing technology
• Had interested investors, full-time job• One key patent pending, filed by a national law
firm• Goal – setting the pre-money valuation for the
company with investors• Client was an experienced business professional
but an inexperienced entrepreneur
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Key Variables
• Is the idea any good?• Does the technology work?• Can the technology be produced at scale?• No customers• No company• Patent was pending• What is the market?
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Income Approach
• Provided own forecasts• Adjusted forecasts for rate of adoption,
obsolescence
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2014 2015 2016 2017 2018 2019 2020
Estimated Market Penetration Percentage na na 100.0% 100.0% 100.0% 100.0% 100.0%
Projected Revenue - Boyd (1) (2) -$ -$ 5,200$ 10,080$ 24,400$ 118,000$ 456,000$
Lifing Factor (3) - - 100.00% 99.99% 99.98% 99.96% 99.92%
Adjusted Projected Revenue -$ -$ 5,200$ 10,079$ 24,395$ 117,950$ 455,644$
Pre-Tax Royalty Savings (4) 2.5% - - 130 252 610 2,949 11,391
Less: Legal Maintenance (5) 7.5% (10) (19) (46) (221) (854)
Less: Operating Expenses (6) 4.0% (5) (10) (24) (117) (453)
Less: Income Taxes 25.0% - - (33) (63) (152) (737) (2,848)
After-Tax Royalty Savings - - 83 160 387 1,873 7,236
Partial Year Factor 1.00 1.00 1.00 1.00 1.00 1.00 1.00 Periods to Discount (7) 0.50 1.50 2.50 3.50 4.50 5.50 6.50 Present Value Factor at a Discount Rate of 65.0% 0.78 0.47 0.29 0.17 0.11 0.06 0.04
Present Value - - 24 28 41 119 279
Cumulative Present Value % 0.0% 0.0% 0.8% 1.7% 3.0% 7.0% 16.2%
Sum of Present Values 3,023 Tax Amortization Benefit (8) 3.4% 103 Fair Value Estimate of Pending Patent Application 3,126
Less: Cost to Complete Technology Development (9) 1,225 Fair Value Estimate of Pending Patent Application (Rounded) 1,900$
Notes:(1) Based on projections provided by Management. (2)
(3) Estimated Lifing Factor as published in Estimating Depreciation for Infrequently Traded Assets, Appraisal Journal, January 2000, Robert K. Ellsworth. See Exhibit B-1 and rep (4)(5)(6)
(7) Assumed mid-period cash flow receipts.(8)(9) See Exhibit G.
Estimated administrative expenses based on published administrative expense (assumed to be 1/2) in the University of California 2006 Office of Technology Transfer Annual Re expenses on $210 MM in revenue).
The tax amortization benefit was estimated using a tax amortization benefit factor based on an income tax rate of 40% and the 15-year intangible assets tax amortization period
---------- Projected (1) ----------For the Fiscal Year Ending December 31,
Based on Management discussions, the patent application was submitted in October 2013 and the Company expected to be assigned a patent number in 2016. Once the patent have a term of 20 years from the date when the application was filed. Therefore, it was assumed that the Company would benefit from this pending patent application / future
Estimated legal and maintenance costs based on published legal expense data in the University of California 2006 Office of Technology Transfer Annual Report ($15.7 MM in n Pre-tax royalty rate was selected based on an independent research of comparable third-party royalty agreements. See Exhibit F.
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Fair Royalty vs. Reasonable Royalty
Fair Royalty• Does not consider
synergies, competitive analysis
• Does not consider court cases
• Purely a financial discussion
Reasonable Royalty• Considers competitive
scenarios• Considers court cases• Strategic value is considered
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Summary of Royalties
Licensor Licensee DateLow
RoyaltyHigh
Royalty
Rutgers, The State University of New Jersey
U.S. Plastic Lumber Corp.
2/17/1997 0.5% 3.0%
Faru Gmbh., Forschungsstelle F"R Analytik, Radiometrie & Umweltechnologie
Eurectec, Inc., The Quantum Group, Inc.
2/19/1998 5.0% 5.0%
Medical Research Council, Sanger Centre
Genomic Solutions Inc.
4/19/2000 0.5% 0.5%
Massachusetts Institute of Technology
Soligen Technologies, Inc.
11/8/1996 2.3% 4.5%
High 5.0% 5.0%Average 2.1% 3.3%Median 1.4% 3.8%
Low 0.5% 0.5%
Selected Royalty Rate (1) 2.5%
Synopsis
Grant the right to utilize Rutgers' Patent Rights and Rutgers' Technology relating to inventions generally characterized as "Composite Building Material From Recycled Waste" to make, have made, use, and sell Licensed Products and to practice Licensed Method in the Territory during the term of this Agreement in the Licensed Field (the use of the Invention for plastic railroad ties, marine pilings, highway spacer blocks, highway guard rails, and building materials).
Grant the right to practice the Technology (Patents, Trademarks and Technical Information now in existence, developed hereafter for the tire rubber de-vulcanization and/or reactivation process) in order to use and operate or sell equipment utilizing the licensed Technology in the Territory.
Grant the right to use the Technical Information (all currently existing trade secrets, know-how, computer programs (including copyrights in said Grant the right to use technology (including any and all knowledge, experience, design data, construction data, operating data, or other
information or know how) created by the Sanger Centre for the Flexys(R) Robot.
Grant the right to practice under the PATENT RIGHTS relating to "Three Dimensional Printing Techniques (3DP)", "Three-Dimensional Printing Techniques", "Ceramic Mold Finishing", "High Speed, High Quality Three Dimensional Printing", "Powder Dispensing Techniques for Successive Layered Fabrication of an Object", and "Binder Composition for Use in Three-Dimensional Printing" and, to the extent not prohibited by other patents, to make, have made, use, lease, sell and import LICENSED PRODUCTS and to practice the LICENSED PROCESSES in the TERRITORY
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Damages in Patent Cases
• 35 U.S.C. § 284 (1988)– “Upon finding for the claimant the court shall award the [patent holder] damages adequate to compensate for the infringement but in no event less than a reasonable royalty…”
• Damages Lost profits Price erosion Not less than reasonable royalty Prejudgment interest Other (treble damages, costs and fees, mixed awards: lost profit and
reasonable royalty)
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Damages – Reasonable RoyaltyREASONABLE ROYALTY
In concept, the Reasonable Royalty attempts to measure a hypothetically agreed value for what the Defendant wrongfully obtained from the Plaintiff.
In practice, the Reasonable Royalty attempts to calculate what the parties would have agreed to as a fair licensing price at the time of the misappropriation.
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Damages – Reasonable Royalty (cont.)CALCULATION OF THE REASONABLE ROYALTY
• Assumes a “hypothetical negotiation” and agreement between a willing licensor and a willing licensee.
• Analysis focuses on the following economic considerations:
The resulting and foreseeable changes in the parties’ competitive posture; The prices past purchasers or licensees may have paid; The total value of the secret to the Plaintiff, including the Plaintiff’s
development costs and the importance of the secret to its business; The nature and extent of the Defendant’s intended use; Whatever other unique factors that might have affected the parties’
agreement, such as the ready availability of alternative processes.
See Linkco v. Fujitsu, Ltd., 232 F.Supp.2d 182 (S.D.N.Y. 2002).
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Georgia Pacific Factors1) Royalties Received by
Patentee for Licensing of the Patent in Suit, Tending to Show an Established Royalty Rate
2) Rates Paid by the Licensee for the use of Comparable Patents
3) Nature and Scope of the License
4) Licensor’s Established Policy and Marketing Program to Maintain Patent Monopoly
5) Commercial Relationship Between Licensor and Licensee
11) Extent of Use by Infringer and Evidence Probative of the Value of that Use
12) Portion of Profit Customary to Allow for Use of the Patented Invention
13) Portion of Realizable Profit that Should be Credited to Patented Invention as Distinguished from Business Risks or Features Added by Infringer
14) Opinion Testimony of Qualified Experts
15) Hypothetical Negotiation Between Licensor and Licensee
6) Effect or Value as a Generator of Sales of Non-Patented Items
7) Duration of the Patent and Term of License
8) Profitability, Commercial Success and Popularity of Products Made Under Patent
9) Utility and Advantages of the Patent Over Old Modes or Devices
10) Nature, Character and Benefits of the Patented Invention to Users
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Georgia Pacific FactorsInfluence on Reasonable Royalty1 Royalties Received by Patentee for Licensing of
the Patent in Suit8 Profitability, Commercial Success and
Popularity of Products Made Under Patent
2 Rates Paid by the Licensee for the use of Comparable Patents
9 Utility and Advantages of the Patent Over Old Modes or Devices
3 Nature and Scope of the License 10 Nature, Character and Benefits of the Patented Invention to Users
4 Licensor’s Established Policy and 11 Extent of Use by Infringer and Evidence Probative of the Value of that Use
5 Commercial Relationship Between Licensor and Licensee
12 Portion of Profit Customary to Allow for Use of the Patented Invention
6 Effect or Value as a Generator of Sales of Non-Patented Items
13 Portion of Realizable Profit that Should be Credited to Patented Invention as Distinguished from Business Risks or Features Added by Infringer
7 Duration of the Patent and Term of License 14 Opinion Testimony of Qualified Experts
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Costs to Complete (1) Amount
Computer 33,000$ Robotics 537,930Materials 23,220Patent 47,565Travel 22,992Insurance 13,996Registrations 1,200Dues 590Technical Books and Journals 1,000Consulting Services 27,000Employee Salaries 399,984Employee Payroll Expenses 116,916
Total Costs to Complete Prototype 1,225,393
plus: Assumed Return Over a 12-Month Period (2) 20% 245,079
Total Costs to Complete Construction Scale 3D Printing 1,470,472
Cost to Complete
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Estimated Lifing Factor
[[(1+r)^n]+[(1+r)^x]]
r = Rate of return (WACC), Exhibit D
n = probable service life
x = present asset age
Notes:
[(1+r)^n]-1Estimated Lifing Factor =
Estimated Lifing Factor as published in Estimating Depreciation for Infrequently Traded Assets, Appraisal Journal, January 2000, Robert K. Ellsworth
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Impact of the ELF
2024 2025 2026 2027 2028 2029 2030 2031 2032 2033
Estimated Market Penetration Percentage 50.0% 50.0% 33.0% 33.0% 33.0% 33.0% 33.0% 20.0% 20.0% 20.0%
Projected Revenue - Boyd (1) (2) 3,136,000$ 6,016,000$ 7,603,200$ 14,530,560$ 27,709,440$ 52,715,520$ 52,512,768$ 31,610,880$ 35,088,077$ 38,833,966$
Lifing Factor (3) 99.34% 98.91% 98.19% 97.01% 95.06% 91.83% 86.52% 77.75% 63.28% 39.40%
Adjusted Projected Revenue 3,115,412$ 5,950,357$ 7,465,712$ 14,095,865$ 26,339,476$ 48,411,000$ 45,433,472$ 24,576,916$ 22,202,596$ 15,300,091$
---------- Projected (1) ----------For the Fiscal Year Ending December 31,
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Market Approach
• Sometimes the value of a company = the value of IP
• Use of guideline public companies• Startup company valuations• 661 publicly traded companies in the US with
revenue of $1 MM - $5 MM
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Company Name TickerMarket
CapitalizationTotal Invested
Capital Revenues
Massive Dynamics, Inc. MSSD $ 1,834,920 $ 2,269,920 -
CoroWare, Inc. OTCPK:COWI 449,703 5,124,753 1,231,600
Lamperd Less Lethal, Inc. LLLI 3,288,548 3,288,548 109,740
Boomerang Systems, Inc. OTCPK:BMER 12,036,000 23,719,720 2,718,410
Xtek Limited ASX:XTE 7,360,504 7,360,504 3,960,120
BlastGard International Inc. OTCPK:BLGA 8,843,940 9,942,040 2,145,080
Maximum 12,036,000$ 23,719,720$ 3,960,120$ Mean 5,635,603 8,617,581 1,694,158 Median 5,324,526 6,242,629 1,688,340 Harmonic Mean 1,762,232 4,924,639 n/aMinimum 449,703 2,269,920 -
Selected Value 1,800,000$
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Cost Approach
• The value may equal the avoided cost of having to reproduce
• Include present value of future cost to complete
• Undervalues/ignores the future earnings potential
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Working (Successfully) with an IP Valuation Expert
• Realistically, you will likely need to hire an industry/market expert
• The valuation expert is completely dependent on counsel to evaluate strength of patent claims
• Time available to complete the assignment is positively related to intellectual content of work product
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Value Doesn’t Depend on Method
Estimated Fair Value
Fair Value - Relief from Royalty Method (1) 1,900,000$
Fair Value - Guideline Public Companies (2) 1,800,000$
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Epilogue
• Client’s initial investors backed out• Initial reaction from other investors was
dubious re: valuation• $1 MM round completed in 5 months• Client quit his job and is running the venture
full time
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Thanks!Questions?
Michael [email protected] [email protected]@unblakeable770-353-8373
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