We will do a valuation of the intangible assets of a new product or technology platform using the income method during the workshop. Key choices: Economic life of the product, discount rates by types of buyers, net present value of free cash flow, and Relief of Royalty. Sources of royalty data and selecting and adjusting comparable licenses.

1. Valuing Intangible Assets
Product Camp MSP 2014
Clyde Hanson, CPVA
Venture Isles, LLC
clyde.hanson@ventureisles.com
Valuation
Workshop

2. Workshop Overview
 Participate in valuing a patented new product
 Learn basic concepts & terminology
 Gain a context for evaluating valuations

3. Example
 RayIsles Ethical Drug Patent
 Indigestion treatment
 Multi-member LLC

4. My start-up’s first valuation
Percent of inventor
ownership by
milestone
Table 6 Nominal Investor
Licensing After US Patent Issuance Total IP Risk &
Share of Royalty & NPV Adjust. 100%
Developing IP Value Value Value Factor Investor
Current status 0% $0 15 100.0%
Less licensing commission 65.0%
Phase I work completed 0.75% $95,625 14 18.1%
Phase II work completed 2% $255,000 12 13.9%
Phase III work completed 6% $765,000 8 7.0%
Post-patent valuation (Sold/Licenced Here) 25% $3,187,500 5 7.0%
Post international patent issuance 35% $4,462,500 4 7.0%
Post-proof-of-concept valuation 50% $6,375,000 3 7.0%
Post-commercialization valuation 85% $12,750,000 2 7.0%
Litigation tested patent 100% $15,000,000 0.9 7.0%
Revenue to inventor at IP sale $222,192

6. Adjustment Calculations

7. Valuation Opinion
After conducting the level of analysis specified in the
scope of work, it is our opinion that the ABC Company
portfolio has a market value of about $217,000 for a
business model A buyer, $998,000 for a business model
B and $423,000 for a business model C as a lump-sum
payment at this stage of the business cycle, for the
sales volumes forecasted, for a “full-line” firm doing all
categories of projects modeled, for a national territory
and with only one bidder.

8. Instant Valuation Volunteer
 One product company
 Patented or patent-pending
 Public information
 Revenue or non-revenue

9. Relief From Royalty Method
 If you had to license the IP from another inventor,
what would avoiding this cost be worth to your
firm if paid in a lump-sum?
 Income approach with market inputs
 Data needed:
 Sales forecast
 Forecasting period
 Royalty rates for comparable IP
 Discount rate for net present value

10. Product/Market
 What’s the product?
 What’s the value proposition?
 What is the price?
 What is industry’s typical gross margin?
 What are the customer segments?
 What is the expected economic life?
 What is the expected adoption curve?
 What is the expected market share?

11. Discount Rate
 Risk free, long-term US Gov. Bonds interest = 2.9%
 Equity risk premium = ………………………………7.2%
 Micro Cap premium = 15.5%
 Tech Industry adjustment = 18% - 9.9% = 8.1%
 Company specific risk =
 Technology risk ________
 Market risk ________
 Intellectual property risk ________
 Execution risk (management) ________
 Less long-term sustainable growth rate = - _________
 PRE-TAX DISCOUNT RATE: ________ %

12. Royalty Rates

13. Forecast Period
 Useful economic life?
 Patent term?
 ____ years

14. Revenue Forecast
 Constant rate of growth?
 Exponential rate of growth?
 Pace of channels?
 Build up from customer segments?

15. Net Present Value
 Discount rate
 Royalties per year
 Number of years
 Paid at end of each year

16. Post-Calculation Adjustments
 Business cycle outlook from valuation date
 Minority control discount / Majority premium
 Lack of marketability
 Regulatory changes foreseen
 Synergistic value
 Capital structure
 Litigation, agreements

17. NPV Example

18. Final Valuation
NPV = _______________
Less adj. ______________
= $ ____________________

19. Valuing Intangible Assets
Product Camp MSP 2014
Clyde Hanson, CPVA
Venture Isles, LLC
clyde.hanson@ventureisles.com
Innovators & Entrepreneurs of MSP Meetup.com
Valuation
Workshop