Valuation and Dealmaking of Technology-Based Intellectual Property

Principles, Methods and Tools

Richard Razgaitis

• Publisher: Wiley
• Year: 2009
• ISBN:
  9780470502860
• Edition: 2
• Topic: Jura
• Subtopic: Gewerblicher Rechtsschutz

This indispensable tool provides readers with complete coverage of the issues, methods, and art of valuing and pricing of early-stage technologies including backgrounds in the core concepts, sources of value, methods of valuation, equity realizations, and negotiation strategies.

CHAPTER 1

Introduction to Opportunity Discovery, Valuation, and Dealmaking

In this opening chapter we will review briefly the key points of Technology D-V-D, namely the Approaches of opportunity Discovery, Valuation, and Dealmaking, and the valuation Methods and Tools to be developed in this book.

Introduction: Technology D-V-D

This book is about three business processes used for transforming technology into money, usually by way of a license agreement. These processes, here referred to as Approaches, are technology: (1) opportunity Discovery, (2) Valuation, and (3) Dealmaking; the overall process is then designated Technology or Licensing D-V-D, where each letter corresponds to the respective Approach. About half of this book is on the Approach of Valuation. There are mountains of books on the general subject of valuation in various business contexts; this one focuses on unique issues associated with technology.

Technology

One can think of three discrete species of transacted rights: businesses, products, and technologies.

• Business transactions. These are usually the outright sale of all assets relating to an operating business including all forms of tangible and intangible property. Such transactions typically include some form of manufacturing or contract-for-manufacturing capability; established sales, marketing, and distribution channels; and, importantly, customers with a revenue history; and all the other elements necessary to operate as a standalone entity for the buyer to take over or integrate into its own operations.

• Product licensing. This enables the buyer to duplicate the making of some device, system, or service that has already been completed and proven by the seller. In this situation, the buyer will need to provide the necessary surrounding business assets to realize a profit from the license.

• Technology agreements. Such agreements designate transactions for pre or early commercial designs and data, normally without the evidence of large scale manufacturability or possibly even a single legitimate customer. In some cases, the final or best formulation has not yet been established. Another way of thinking of technology is as a work product of research and development (R&D). Put yet another way, R&D is a business operation that has as its successful result technology. Such an R&D work product can range all the way from a raw concept, at one extreme, to the results of many years and many millions of dollars’ worth of investigation with comprehensive data books, samples, test results, financial projections, and business plans, as well as outside verification by certification agents and potential customer feedback from trials.

However, the term “technology” is challenging to define exactly. It is meant to encompass the broad meaning intended by its Greek root, techne,¹ which designates the craft, skill, and “know-how” associated with making some product or performing some service. This meaning of technology would apply to not yet commercially demonstrated superconductivity inventions based on sophisticated semi conductor physics to software code that has a demonstrated potential of controlling some important business process.

The key ingredient missing from technology licensing that is present in both business and product licensing is a commercial track record. Without such ingredient, the customary approaches to product and business valuations do not work well because the underlying data usually relied upon do not exist. To make this more concrete, consider an automotive example. In early 1999, Ford Motor Company made an offer to buy and ultimately bought Volvo’s automotive business (and in late 2008 Ford announced it is planning to sell its Volvo operations). In developing the valuation of this transaction Ford in 1999, as the buyer, and in 2009 Ford as the seller has access to many years of financial and operational data as well as forecasted performance based on such data, and any subsequent buyer of this asset will be able to study the Ford data during its period of ownership. This is the nature of sale of business transactions.

Alternatively, Ford could have licensed from Volvo the right to make and sell Volvo cars in the United States in Ford plants based on Volvo proprietary information and patents. Again, in such a situation, Ford would have been able to study an extensive historical basis of the costs and revenues of making a Volvo car, and use such information to develop projections of profitability. This would have been a product transaction, because Ford would have had to use its business assets to make and sell the cars.

An example of a technology transaction would be Ford’s acquisition of the rights to a Volvo invention that Ford could then develop and use in their manufacture of Ford cars, or for some other business purpose. With such technology transaction species, there is often no product or business history because what is being licensed is newly developed and has not yet reached the stage of a product, or the nature of its commercial use would be substantially different in the hands of Ford as the licensee. Although the tools and methods discussed in this book can be of use in business and product transactions, the main objective here is in support of technology licensing.

Technology and Intellectual Property Rights

Technology rights are usually expressed in three forms of intellectual property (IP): patents, trade secrets (also known as know-how, or proprietary technical information), and copyrights. Such IP can be considered as the form by which the technology rights are documented, protected, and conveyed.

It will be assumed that IP protection exists when considering the valuation of technology. There is always some uncertainty about the breadth and strength of such protection, and this uncertainty factors into the value determination. If there are issued patents, there can be some uncertainty surrounding interpretation of claim language or even the validity of the patent itself. If the patents are still pending, then there will be uncertainty about what will be allowed by patent offices in various countries of the world. There can also be uncertainties about trade secrets. It may not be well understood how “secret” the trade secret really is; it could be that many other labs and companies have independently arrived at the same information or soon will do so. Also there is always some risk of inadvertent disclosure of the trade secret by the seller or buyer or by some third party that would damage the value of the underlying technology asset.

The extent and strength of IP protection are dimensions of a valuation. An extreme example of such effect is the absence of value if the inventing organization publicized all the details of its invention in such a way as to preclude obtaining a patent or any other form of IP protection. So the absence of protection can and normally does preclude value (although even with minimal IP protection there can be situations where the seller’s commercial assistance can accelerate time to market and create value for the buyer). However, the converse is not true: It is possible to have very strong patent and trade secret protection and still not have much or any value because, for example, of the absence of a market for the product made by the underlying technology (though there can be option value to ownership of a right with no immediately obvious commercial use).

Thus, as a general guideline, some extent and form of IP protection is a necessary but not a sufficient condition for value to exist.

Considerations about which forms of IP should be used in which contexts, and analysis of the strengths and weaknesses of each, are outside the scope of this book. In the valuation examples considered it will be assumed that the technology is protected in some way or combination of ways. When risk issues are considered, or when comparisons are made to reference agreements, then strength and extent of IP protection will be identified as a factor to be considered when performing a valuation.

Technology licensing is becoming an increasingly important transaction category but does not have the abundance of tools and experience available to business and product transactions. This book is intended to contribute to the field of technology valuation.

Technology Opportunity Discovery

In some situations the opportunity for technology licensing is obvious: There is a specific package of IP rights and underlying technology assets that the owner seeks to monetize in some way other than its own commercial development into products and markets. However in many situations, the IP owner has many technologies, perhaps thousands, as a result of significant R&D investments over the years not fully utilized in its own products, or “left-over” technology assets from a major acquisition, or a closing down of a major operating division and the opportunity exists to sell it in parts. In the latter situation there can be more opportunities than can be practically analyzed in detail, and some prioritization must first take place.

In all cases there is the discovery issue of identifying potential commercial applications that may not have been envisioned by inventors or prior business developers. Technology can be created focused on purpose A and instead, or in addition, be valuable for purpose B, or A, B, and C. The challenge and need for a technology owner, is to develop an initial recognition, which is Discovery, of licensing opportunities that are valuable. This business process is the Approach of opportunity Discovery.

We will cover opportunity Discovery in Chapter 3.

Valuation

The heart of the matter with technology transactions is value. This is sometimes expressed as the “So, what?” question, which is the natural response to any long winded and involved description of the latest and greatest invention. The answer usually begins with a discussion of who in the world will have a happier life because of it, and then how much would that happier life be worth to them if someone were in the business of providing this vehicle of happiness.

For the reasons discussed above, determining technology value is a challenging task. We will consider six Methods, and numerous Tools that derive from such Methods in six separate chapters, Chapters 4 through 9, covering the Approach of Valuation.

Dealmaking

The vehicle of technology transactions is a contract between a seller and buyer, normally a license. Such license conveys technology rights from the licensor, or seller, to the licensee, or buyer. For simplicity, hereafter the licensor will be referred to as the seller, and the licensee as the buyer.

The transaction between buyer and seller is a trade. Sometimes the trade is as simple as money from the buyer in exchange for assignment of a patent by the seller. In most cases, the trade is much more complex. But it is always a trade. Building on this fundamental idea I have introduced the acronym TR R A DE™ to structure this discussion. Within the scope of the book, all transactions are founded on the TR R A DE™ framework:

• TR is used to designate Technology Rights conveyed in the licensing transaction.

• R is the risk involved in any transaction.

• A represents the art behind the opportunity Discovery, Valuation, and Dealmaking Approaches

• DE is the deal economics.

The process of valuation and pricing determines the transaction deal economics, (the DE in our acronym). So, in shorthand form, this book is about TR for DE. The business process of making such happen as trade is here called Dealmaking, our third Approach. Dealmaking will be covered in two Chapters, 10 and 11. As we shall see this Approach also involves opportunity Discovery, because the technology opportunity discovered in Chapter 3 has to match with the business opportunity to be discovered with/for a prospective buyer.

Depending on the complexity of the transaction, there can be numerous issues and agreements that are included in the Dealmaking and additional to a technology license. For the transfer of physical assets, such as lab equipment or technology prototypes, there may be a separate purchase agreement. For circumstances where key employees are to leave the...