Valuation of intellectual property

Buyers and sellers must overcome in intellectual property transaction negotiations. The seller tends to focus on the reward. The buyer tends to focus on the risk.

A new technology has the potential for creating significant value if successfully developed. It also carries the risk of being completely worthless. Great novelty allows for great potential value and great development risk.

Both patents and pending applications are capable of valuation. A pending patent application can in fact be licensed, on a voluntary basis between the parties, and thus has value to your business. However, the value is discounted due to the risk that your patent right may not be granted.

For acquisition of intellectual property, valuation is obviously of significant importance, particularly in technology-driven deal.

Existing approaches include the “relief from royalty” method, which involves looking at comparable licensing deals for particular technologies and applying the associated royalty rate to the expected sales stream related to the technology being valued and then discounting back to a lump-sum value. “Cost to recreate” can also be used as floor valuation level in certain situations.

New valuation applications include both real options and enhancing the relief from royalty method combined with patent mapping features. A real option is a technique that treats technology, particularly partially developed technologies, as a call option.

Analogous to a financial call option, partially developed technology has an underlying derivative asset, from which volatility can be measured with comparables and / or simulated and a strike price.

Using a financial option pricing methodology, the option premium or value of the technology in the current state can be estimated.

For licensing, cost-based valuation equates the value of the technology with the cost to replace it, either with identical or equivalent technology. In addition, in market-based valuation, comparable transactions are analyzed to determine a technology's value. Accurate market-based valuations require that there are active markets in comparable technologies, that these comparable technologies be sold and the sales terms are known, and that all transactions be studied between independent and willing parties.