Valuation and Dealmaking of Technology-Based Intellectual Property E-Book

Richard Razgaitis

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 1363

Veröffentlichungsjahr: 2009

Beschreibung

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.

Leseprobe

Table of Contents

Title Page

Dedication

Copyright Page

Preface

Disclaimer

About the Author

Acknowledgements

CHAPTER 1 - Introduction to Opportunity Discovery, Valuation, and Dealmaking

Introduction: Technology D-V-D

Taxonomy of Technology Licensing

High Significance, High Ambiguity Contexts

Licensing D-V-D and Innovation

Going Forward

Notes

CHAPTER 2 - Risk and Reward

Uncertainty

Phronesis (Judgment)

Technology Uncertainty

More on Risk

Value and Price

Two Final Points on Buying and Selling

Notes

APPROACH I - Opportunity Discovery

CHAPTER 3 - Identifying and Prioritizing Technology Opportunities

Seller “Opportunity Space”

The Technology Box

Buy-Side Expressions of Value: The Wheelbarrow

Overview of Valuation Methods

The Six Valuation Methods

Conclusion

Notes

APPROACH II - Valuation

CHAPTER 4 - Method 1: Use of Industry Standards for Valuation

The Concept and Limitations of “Industry Standards”

Sources of Industry Standard Data and Information

Survey Results as a Source of Industry Standards Data and Information

Proposed or Established Norms

Shopped Term Sheets and Price Lists

News Sources of License Agreement Information

Journals, Proprietary Databases, Reports, and Consultants

Published License Agreements as a Source of Industry Standards

Court Cases/Judgments as a Source of Industry Standards

Patent Pools

Lifetime and Organizational Learning

Average Error

Concluding Observations and Cautionary Notes

Appendix 4A: Outline of Agreement between DuPont and University of Houston

Notes

CHAPTER 5 - Method 2: The Rating/Ranking Method, and Tool

Ubiquity of Rating/Ranking

Overview of How Rating/Ranking Can Be Used in Valuation

Groups and Grouping as a Fundamental Knowledge Forming Process

Using Rating/Ranking to Value Technology: Factor Assessment

Developing Criteria for Using Rating/Ranking for Valuation of Technologies

Illustrations of Applying the Rating/Ranking Method

Issues in Interpreting Value from a Rating/Ranking Result

Using Rating/Ranking to Value Technology: Classified Value

Uses of Rating/Ranking with Approaches and as a General Tool

Perspectives on Rating/Ranking as an Approach with Licensing

Knowledge, Uncertainty, and Humility

Conclusion

Appendix 5A: Factors in Pricing License

Notes

CHAPTER 6 - Method 3: Rules of Thumb to Determine Valuation

Foundations of Rules of Thumb

Cost Savings Example of the 25 Percent Rule

Perspectives on the 25 Percent Rule

Use of the 25 Percent Rule for Apportioning New Profits

Examples of Applying the 25 Percent Rule to New Profits Licensing

A Universal Rule of Thumb Chart

Other Percent Rule Values

Some Misuses / Misapplications of the 25 Percent Rule

Other Valuation Rules of Thumb Used (or Have Been Proposed)

Summary Points on the Use of the 25 Percent Rule

Conclusion

Notes

CHAPTER 7 - Method 4: Discounted Cash Flow Method to Determine Valuation

Overview of the DCF Method

Basic Financial Concepts

Quantification, Classification of Risk

An Example Cash Flow Projection from a License

Additional Considerations for Calculating DCF

Segment and Scenario Analysis

Segment Analysis

Cash Flow Projections

Cash Flow (GCF) Corporate Examples

Other Issues to Be Considered with the DCF Method

Conclusion

Sources of Information to Develop Business Projections

Notes

CHAPTER 8 - Method 5: Advanced Valuation Methods Monte Carlo and Real Options

Modified Discounted Cash Flow Method

Monte Carlo Method

Final Points on the Monte Carlo Model

Real Option Methods

Conclusion

Online Resources

Appendix 8A: Example Crystal Ball Report for

Appendix 8B: Crystal Ball Report Corresponding to the Results Presented in ...

Notes

CHAPTER 9 - Method 6: Valuation by Auctions

Introduction to Auctions

When Auctions are Feasible

Auction Examples

Auctions as Distinct from Other Types of Dealmaking

Auction Strategies for Buyers

Auction Caution

Conclusion

Appendix 9A: Bidder’s Agreement

Notes

APPROACH III - Dealmaking

CHAPTER 10 - Approach: Deal Structure

Return to the Box and Wheelbarrow

Cash When Pricing Structures

Cash As Pricing Structures

Cash If Pricing Structures

Cash Maybe: Options

Consideration Forms Beyond Simple Cash

Special Form of Cash If : Equity

Balancing Simplicity with Comprehensiveness

Conclusion

Notes

CHAPTER 11 - People, Process, and Lessons Learned

Introduction

Deal Team

Deal Targets

Negotiating Plan

Plan B

Concluding Advice from Technology Dealmakers

Notes

CHAPTER 12 - In Conclusion

Approach of Opportunity Discovery as a Quest

Approach of Valuation: A Review of the Six Valuation Methods

Approach of Dealmaking

Closing Thoughts

Notes

APPENDIX - List of Abbreviations and Trademarks

Bibliography

Index

For the late Bill Riley, long time licensing mentor at Battelle.

Copyright © 2009 by Richard Razgaitis. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

This book is a completely revised and expanded edition of Richard Razgaitis’s previous book, titled Valuation and Pricing of Technology-Based Intellectual Property (978-0-471-25049-4).

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eISBN : 978-0-470-50286-0

Preface

This book is the fourth that I have written for John Wiley and Sons. All of them in some way have been about creating value from technology by identifying opportunities, valuing and pricing those opportunities, and Dealmaking.

The 1999 book, Early Stage Technologies: Valuation and Pricing, was my initial effort that developed the Six Methods of Valuation:

(1) Industry Standards

(2) Rating/Ranking

(3) Rules of Thumb

(4) Discounted Cash Flow

(5) Advanced Methods

(6) Auctions

In 2003, I updated and expanded the 1999 book as Valuation and Pricing of Technology-Based Intellectual Property. In the same year, I wrote a separate book on Dealmaking: Dealmaking Using Real Options and Monte Carlo Analysis.

In the present book, I have expanded most of the material in the three earlier books and cohered it all (I hope) in three core technology commercialization business processes, designated as Approaches. They are: opportunity Discovery, Valuation, and Dealmaking, hence the acronym Technology (or Licensing) D-V-D. In particular I have expanded the use of Monte Carlo as an Advanced Valuation Method. The text provides a link to my web site—www.razgaitis.com—that includes spreadsheets used in this book, as well as a means to obtain a free trial of the Monte Carlo software (Crystal Ball developed by Decisioneering, now a part of Oracle Corporation) to enable the reader to run his or her own simulations, and to provide a place for the inevitable errata.

My focus throughout has been on “opportunity Dealmaking,” as opposed to litigation contexts. Accordingly, the subject matter of Dealmaking is typically something other than bare patents in a process of sellers and buyers discovering value and enhancing deal structures to their mutual benefit. Technology Dealmaking is that special conjunction of the oldest form of human interaction, trading, with the most modern, technology. The nautical theme of the cover art is intended to be suggestive of this ancient quest for economic benefit through trade in the face of significant risk. The Approaches, Methods, and Tools (A-M-T) here presented are with the intent of being a kind of lighthouse, overarching business principles, not with the aspiration of risk removal, but to support risk-based opportunity discovery, valuation, pricing, and Dealmaking.

Throughout the book, I have made numerous changes and clarifications in the hope of making the points clearer and more useful and fitting together the complete business process of opportunity discovery, valuation, and Dealmaking. Arthur Schopenhauer (1788-1860) in an 1844 edition of his classic book, The World as Will and Representation (or Idea) originally published in 1818, wrote: “Now, as regards this second edition, in the first place I am glad that after twenty-five years I find nothing to retract; my fundamental convictions have been confirmed, at any rate as far as I myself am concerned.”a In his final edition of that book, he changed not a word from text he had written 40 years earlier. From this perspective, his 1844 edition, and his final 1858 edition included his 1818 text unchanged.

In contrast with that genius, I have tried to change anything and everything in my previous writing that I could to make it better and more complete, as well as more interesting, even fun to read. I have made extensive use of everyday terms of art—some might even call it business slang—to be as expressive as possible at the cost, perhaps, of some textual dignity. But Carl Sandburg, that Chicago big shoulders/Tool Maker city poet, said it well: “slang is a language that rolls up its sleeves, spits on its hands, and goes to work.” Putting technology to work is what I’ve tried to do here, using down-to-earth language to do it. I am still not done with that work, but it is the best I can do at the moment. It does not, however, represent my final views on the subject of technology valuation and pricing. I have intended it to be an educational contribution to my profession, not as a proof text on some narrowly defined dispute, but as a systematic discussion of tools, methods, and principles, that can be developed and applied to that most challenging task of developing a model framework for establishing its worth, and reaching agreement with a Dealmaking partner.

Disclaimer

It may not be necessary, but it is probably prudent, to point out what should be obvious: This is not intended as a proof text in support of litigation. The context of the valuation methods considered here and my associated observations and suggestions is in support of opportunity licensing, not enforcement. Further, each licensing and valuation opportunity is specific to the given fact situation; so it is unwise and even misleading to take a passage of static words and assume that it can be applied without consideration of the specific circumstances by the exercise of reasoned judgment.

About the Author

Dr. Richard Razgaitis began his career in technology on an exact date, May 25, 1961, on the occasion of President Kennedy’s pronouncement:

I believe that this nation should commit itself to achieving the goal, before this decade is out, of landing a man on the Moon and returning him safely to the Earth. No single space project in this period will be more impressive to mankind, or more important in the long-range exploration of space; and none will be so difficult or expensive to accomplish.

On that day he selected his undergraduate major, Aeronautical and Astronautical Engineering. That led to his becoming first a “rocket scientist,” then part of the Cape Kennedy launch team from the first Apollo flight in 1966 through the first lunar landing of Apollo 11 in 1969. He had the unique privilege of loading the fuel into the Saturn S-IVB that sent the first men to the moon: Apollo 8, December 21, 1968, Frank Borman, James Lovell, and William Anders.

He was a professor for more than 10 years at the University of Portland and Ohio State University where he taught more than 20 different undergraduate and graduate level classes. He has worked in industry for the past 30 years, including 10 years as Vice President of Commercial Development for two billion dollar R&D organizations, Battelle and Bellcore. For the past 11 years he has been a senior consultant with Charles River Associates and predecessor firms IPC Group and InteCap LLC.

He holds a B.Sc. in Aeronautical and Astronautical Engineering from the University of Illinois, a M.Sc. in Aerospace Engineering from the University of Florida, a Ph.D. in Mechanical Engineering/Thermal Fluid Sciences from SMU, and an MBA from Ohio State University. He has been a registered professional engineer in three states. He has been a long-time Board Member of the Licensing Executives Society including holding the chair of Treasurer. He was on the Board of the Licensing Foundation for six years and for three years its President. He also served a three year term on the Board of the National Inventor’s Hall of Fame, which period included the special induction in 2003 on the 100th year anniversary of flight, including the Lifetime Achievement Award for John Glenn, the first American to orbit the earth in Mercury Friendship 7.

He has written four books published by John Wiley & Sons, four book chapters published by the Association of University Technology Managers, the Licensing Executives Society International (LESI), and by the Centre for the Management of Intellectual Property in Health Research and Development and the Public Intellectual Property Resource for Agriculture, and four annual survey articles on the key issues in the licensing industry in les Nouvelles, the journal of LESI, on behalf of The Licensing Foundation.

Acknowledgments

One of the themes of this book is the multidisciplinary context for Technology D-V-D, and the need for active learning. So the list of people I would like to acknowledge is long, but by no means exhaustive. Although I have been involved in putting technology to work since 1965 when I joined the Apollo Program as a “rocket scientist,” my work in technology licensing did not begin until the early 1980s when I worked for Battelle Memorial Institute. When I joined its Battelle Development Corporation I was mentored by a special group of long time employees,

Much of my life has been spent in learning. Some would say, I still have a long way to go (which is true, but details on that are more appropriate to a confessional). Here I want to offer heartfelt thanks to you many “teachers” that in some meaningful way contributed to the thinking expressed here.

For 14 years and 2 months, I had the privilege of working for Battelle in Columbus, Ohio. During the early years of this period I had the opportunity of working for Battelle Development Corporation (BDC), a wholly owned subsidiary that had been responsible for commercializing Battelle and outside inventor technology since 1935. During those years at BDC, I happened to be present during the retirement transition of an unusually talented group of individuals who took the time and patience to share with me over a period of years their insights from an incredible breadth of experience. Although the content of this book is mine, I would be remiss not to acknowledge the influences that this unique opportunity afforded me. Bill Riley, to whom this book is dedicated, hired me into BDC. Bill was an endless source of experience-filled marketing and dealmaking stories; many of those stories deserve a string instrument composition to elevate them to more-than-Irish ballads (really more like Homeric Epics). Bill’s 29 years with Battelle, long term participation in the Licensing Executives Society (including a term as LES President), and wise memory were, for me, like attending an academy of licensing learning. His recent passing is a loss I feel every time I hear of a funny moment in licensing that I wish I could share with him.

Ken Shaweker was also a 30-year veteran of licensing experience, mostly at Battelle. He was BDC’s IP Counsel. As our lead attorney, he was a model of reasoned judgment combined with sagacity in developing solutions to meet worthy business objectives and taught me lot about agreements and people.

Steve Dickerson, another 30-year man and head of BDC for many years, was tireless in his enthusiasm and pursuit of opportunities. In negotiations he was both gracious and quick thinking, a very potent combination.

Dr. Charles Schwartz was, unbelievably, our 50-year man. His breadth and currency of technical insight was astounding; and as to kindness and patience, I have known only one other that deserves mention in the same breath.

Art Westerman (“just” a 40-year man) in addition to his business development skills was a great writer and teacher of business writing (sorry that I didn’t learn better than I did).

There were many others at Battelle who were not part of the retirement transition but who were part of my licensing and valuation “faculty”: Barry Bissell, Bob Zieg (who as Ken’s replacement shared the fruits of 26 years of patent/licensing experience), Bill Huffman, Roland Adoutte, L. Don Williams, Gene Eschbach, and many others.

I owe a very special debt to four very talented administrative assistants whose teachings often had to be by the rescue method: Carol Cremeans, Shirley Russell, Shari Dean, and Mary Ann Dillon.

I am likewise indebted to my experiences and opportunities at Bellcore, now Telcordia Technologies. One of my teammates there, the late Bruce Sidran, was the object of dedication in my 2003 Dealmaking book. I miss his friendship and great sense of humor.

For 11 years now I have been associated with a consulting group headquartered in Chicago, initially under the name IPC Group, then Intecap LLC, which then became part of Charles River Associates. The name keeps changing on the door, but most of the people are still there. I would like to acknowledge the special client working relationships I have had with colleagues Dan McGavock and Bob Goldman, and in times past with Brian Oliver and Mike Lasinski. In particular I want to acknowledge two Charles River Associates colleagues, Lew Koppel and Bob Goldman, who made numerous helpful suggestions based on their review of this manuscript. There is a long list of others with whom I have worked however I cannot name them all.

My association with the Licensing Executive Society (LES) has been a constant source of learning from many people who have also become friends. If I start mentioning names, I would never know where to stop. LES is simply an outstanding group of individuals who have universally been both gracious and wise, an uncommon combination.

The origins of these books can probably be traced to a conversation I had with Lou Berneman who, on behalf of the Association of University Technology Managers (AUTM), asked me to teach the valuation section of AUTM’s introduction to licensing course. That invitation, and honor, became an annual event for me for some dozen years and lead to my writing the valuation chapter in AUTM’s License Practice Manual, which has now been revised. I owe thanks to Lou, AUTM, and in particular the two thousand plus students who have participated in that experience; these many interactions have helped me solidify my own thoughts and defog some aspects.

In my 11 years consulting I have done perhaps 200 or more projects, and given numerous day and multi-day valuation “workshops” for clients. One of the benefits of all these experiences is the learning that takes place in every encounter, every question. Thanks to all of you for the opportunities to serve you by these assignments. Although I have been careful not to disclose anything proprietary from these engagements, the inevitable learning that comes from them has been a lifelong benefit.

Perhaps I owe my greatest learning debt to those many individuals with whom I negotiated, or attempted to negotiate, licensing agreements, including those necessary negotiations with my own teammates. Your reasoned and articulate explanations, of how you viewed the subject opportunities have swirled through my memories many times and continue to do so even now, many years later. It is an axiom of negotiation that Dealmaking is a mutual learning experience. I don’t know how mutual it has been, but for me it has been the learning laboratory and my thanks goes out to all of you.

This is not the kind of personal book that causes me to focus on the contributions of my family. But, it has been their encouragement and patience and source of earthly purpose that has kept me going: So to you, Carol (my loyal wife of now two plus years and counting) and children of whom I am so proud... Rich, Renda, Christy, Jodi, and Leslee, I say “thanks.” These six have all at one time or another asked “What exactly is it that you do?” This book is a long answer.

Lastly, my thanks go to Susan McDermott and Emilie Herman at John Wiley & Sons, and Martha Cooley who welcomed me into the Wiley relationship with that first book. Thanks for encouraging my writing, especially when things were going slowly.

CHAPTER 1

Introduction to OpportunityDiscovery,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.