1. Intellectual Property Valuation
Case Study
Michael S. Blake, CFA, ASA, ABAR
Director of Valuation Services
Sidebar by Howard Zandman, CPA/CFF, CFFA
Partner, Dispute Resolution Services
Habif, Arogeti & Wynne, LLP
michael.blake@hawcpa.com
howard.zandman@hawcpa.com
770-353-8373
@unblakeable
2. 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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3. 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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4. Why Value Intellectual Property?
• Transaction
• Bank Collateral
• Financial Reporting
• Tax Reporting and Compliance
• Litigation
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5. 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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6. 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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7. Income Approach
• Provided own forecasts
• Adjusted forecasts for rate of adoption,
obsolescence
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8. 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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9. 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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10. Summary of Royalties
Licensor Licensee Date
Low
Royalty
High
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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11. 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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12. Damages – Reasonable Royalty
REASONABLE 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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13. 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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14. Georgia Pacific Factors
1) 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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15. Georgia Pacific Factors
Influence on Reasonable Royalty
1 Royalties Received by Patentee for Licensing of
the Patent in Suit
8 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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16. Costs to Complete (1) Amount
Computer 33,000$
Robotics 537,930
Materials 23,220
Patent 47,565
Travel 22,992
Insurance 13,996
Registrations 1,200
Dues 590
Technical Books and Journals 1,000
Consulting Services 27,000
Employee Salaries 399,984
Employee 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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17. 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]-1
Estimated 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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19. 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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20. Company Name Ticker
Market
Capitalization
Total 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/a
Minimum 449,703 2,269,920 -
Selected Value 1,800,000$
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21. 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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22. 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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23. 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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24. 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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