In my work with founders, I have been asked many times about how to value the intellectual property (IP) assets that the company has. These questions are not theoretical, as patents can raise a company’s valuation by investors, and patents can also be collateralized by using them as security for a loan or line of credit. Additionally, patents can also be sold or licensed to generate revenue, which can also be used as collateral for a loan. If you are interested in finding out how patent and IP assets can be used to raise capital for the company, read on!

Table of Content

What does intellectual property valuation mean?

What are the benefits of valuing your IP assets?

Steps to valuing intellectual property

Valuing Intellectual Property–Methodology

What factors influence IP Valuation?

IP Basics

Intellectual property can be described as an intangible asset, which is the result of a company’s work or reputation.  An IP asset could be a patentable or patented product, process, or service, or a trademark or copyright. Intellectual property, in short, IP includes a group of non-physical assets that is protected from unauthorized use. It is the unique creation and value of a company. According to the US government: Intellectual property protection is critical to fostering innovation. Without protection of ideas, businesses and individuals would not reap the full benefits of their inventions and would focus less on research and development.

For founders, patents can increase the startup’s value by giving it a competitive edge and showing a commitment for innovation. Investors may also be able to see that the startup’s technology has potential to generate revenue. Patents are a signal that it is valuable. Here are some ways that patents can increase the startup’s value:

  1. Protecting IP: Patents are able to prevent others from using or copying the startup’s technology without permission. This can help the startup keep a competitive edge in the market.
  2. Innovation is evidenced by patents. Patents show that a startup is dedicated to innovation and has unique technology that makes it stand out from its competitors.
  3. Potential revenue stream: Patents may be licensed or sold to generate a revenue stream for startups.
  4. Attracting investors: Patents are a signal to investors that the startup’s tech is valuable and can generate revenue. This can help increase the startup’s valuation to investors.

When you discuss the value of IP assets, it is important to prepare for negotiations with investors and have a good understanding of startup finances, including projected revenue, expenses, and anticipated revenue. A clear understanding of the startup’s patent portfolio is essential, including its potential value and associated costs. Be open and honest about your startup’s strengths, weaknesses, and be ready to answer any questions investors might have about the patents. It is important to be flexible during negotiations and open to compromises.

Recent events such as high-profile mergers and acquisitions and litigation have made intellectual property (IP) an increasingly important part of global economics. Many organizations fail to recognize the impact of their IP and the risks it poses, even though it accounts for a large percentage of company’s value. It is highly recommended that you seek the guidance of financial and legal professionals to assist with the negotiation process and ensure that terms are fair and favorable to your startup.

What does intellectual property valuation mean?

IP valuation is the process of evaluating IP assets in a fair market. Valuation of intellectual property helps to determine not only the IP value but also the truel business value. Since IP is often the most valuable asset a company has, accurately valuing the intellectual property of the business is crucial in determining its value.

What are the benefits of valuing your IP assets?

1. Generate Revenue through Licensing and Franchising

An in-depth understanding of IP Assets is essential for informed negotiations and decision-making regarding terms and conditions of licensing-out or licensing-in of IP determining fair and solid royalty rates. In the case of franchising, the franchisor, as well as the franchisee, needs to have a deep understanding of the value of the trade secrets, trademarks, and other intellectual property assets. 

2. Increase Company Valuation in Merger and Acquisition (M&A), Joint Venture, or Strategic Alliances

When companies are acquired, one of the assets to be valued will be the IP assets. IP valuation allows the parties to make informed decisions about the acceptable cost capital and the financial leverage strategy that should be used. It can also positively impact the company’s share price and value. World-class companies use IP valuation to acquire brands. 

3. Investment in Research and Development

IP valuation is useful in resource allocation and budgeting. If a company invests significant resources in internal R&D but loses ground to its competitors because of slow or late product launches, it might need to rethink its R&D strategy. The IP valuation provides strategic guidance to new product development, brand extensions, line extensions, and managing foreign filings and prosecution costs.

4. Financial Reporting

Recognizing the growing share of IP assets within the enterprise’s total market value has prompted a shift in how the accounting community treats IP assets in financial reporting. The international accounting standards board (IASB) now acknowledges acquired and identifiable intangible assets. All acquired IP assets must be recognized as assets on the balance sheet of any business that acquired them. 

5. Optimizing Taxation

To optimize the tax a company pays, it is necessary to value its assets, including IP assets. There are many tax planning opportunities in IP assets, both in third-party transactions and internal strategies like cross-border transfer pricing or centralizing ownership of IP assets within IP holding companies. Internal revenue services want to know as much information as possible about the basis of any value determination used in allocating portions of the purchase prices associated with an acquisition of a company. The valuation of IP assets is important in determining fair transfer prices to be used by subsidiary companies.

6. Insurance for IP assets

There is a new market for the insurance of IP assets. Major insurers from developed countries are creating products that tie to the capital value of IP assets, particularly trademarks/brands. As long as the insurance is concerned, valuation is of extreme importance.

Steps to valuing intellectual property

The market price for IP is often used to determine the value of the IP. There are three basic steps that help to value IP.

  1. Determine the IP source.
  2. Determine the main benefits associated with IP.
  3. Choose the best approach to meet your valuation requirements: market-based approach, Cost approach, or elimination approach, which is based on the valuation of IP equal to the business’s value, less tangible net assets, and goodwill that are not directly attributable to IP.

Valuing Intellectual Property–Methodology

There are several methods to value patents and intellectual property (IP), including the following:

  1. Cost approach: This method values the IP based on the cost of creating or acquiring it.
  2. Market approach: This method values the IP based on comparable transactions or market prices for similar IP.
  3. Income approach: This method values the IP based on the income it is expected to generate in the future. This can include projected licensing revenues or cost savings from using the IP internally.
  4. Relief from royalty method: This method calculates the value of the IP by determining the amount of royalties that would have to be paid if the IP were licensed to a third party.
  5. Option pricing model: This method values the IP as if it were a financial option, taking into account factors such as the expected life of the IP and the likelihood of commercial success.

Patent Valuation

There are several factors that can affect the valuation of a patent, including:

  1. The strength of the patent: The strength of the patent is an important factor in determining its value. Factors that can affect the strength of a patent include the scope of the claims, the prior art, and the likelihood of the patent being upheld in court.
  2. The stage of development: The stage of development of the technology or product that is covered by the patent can affect its value. For example, a patent on a product that is already in commercial production is likely to be more valuable than a patent on a product that is still in the early stages of development.
  3. The market demand: The market demand for the technology or product that is covered by the patent can affect its value. A patent on a technology or product that is in high demand is likely to be more valuable than a patent on a technology or product that is not in demand.
  4. The size of the market: The size of the market for the technology or product that is covered by the patent can affect its value. A patent that covers a technology or product that is used in a large market is likely to be more valuable than a patent that covers a technology or product that is used in a small market.
  5. The competition: The level of competition in the market for the technology or product that is covered by the patent can affect its value. A patent on a technology or product that is protected from competition is likely to be more valuable than a patent on a technology or product that is in a highly competitive market.
  6. The enforceability: The ability to enforce a patent can greatly affect its value. A patent that is easy to enforce is likely to be more valuable than a patent that is difficult to enforce.
  7. Licensing and royalty potential: The potential to license the patent and the potential for royalty income can greatly affect its value. A patent that has high licensing and royalty potential is likely to be more valuable than a patent with low potential.

Trademark Valuation

There are several factors that can affect the valuation of a trademark, including:

  1. Brand recognition: The level of brand recognition is one of the most important factors that can affect the value of a trademark. A trademark that is well-known and has a strong reputation is likely to be more valuable than one that is not as well-known.
  2. Length of use: The length of time the trademark has been in use can affect its value. A trademark that has been in use for a long time is likely to be more valuable than one that is new.
  3. Scope of use: The scope of use of the trademark can affect its value. A trademark that is used in a wide range of products and services is likely to be more valuable than one that is used in a narrow range of products and services.
  4. Market share: The market share held by the products and services associated with the trademark can affect its value. A trademark associated with products and services that have a large market share is likely to be more valuable than one associated with products and services that have a small market share.
  5. Legal protection: The legal protection of a trademark is also important. A trademark that is protected by a registration is more valuable than one that is not registered.
  6. Licensing and royalty potential: The potential to license the trademark and the potential for royalty income can greatly affect its value. A trademark that has high licensing and royalty potential is likely to be more valuable than a trademark with low potential.
  7. Competition: The level of competition in the market for the products and services associated with the trademark can affect its value. A trademark that is protected from competition is likely to be more valuable than a trademark that is in a highly competitive market.
  8. Quality of the trademark: The quality of the trademark is also important, a trademark that is easy to remember, pronounce, and spell is more valuable than a complex one.

There are several factors that can affect the valuation of a copyright, including:

  1. The type of work: The type of work that is protected by the copyright can affect its value. For example, a copyright on a popular novel or a blockbuster movie is likely to be more valuable than a copyright on a niche technical manual.
  2. The length of copyright: The length of time the copyright is in effect can affect its value. A copyright that will be in effect for a long time is likely to be more valuable than one that will be in effect for a shorter time.
  3. The potential revenue streams: The potential revenue streams associated with the copyrighted work can affect its value. For example, a copyrighted work that has potential for licensing, royalties, or other forms of income is likely to be more valuable than one that does not.
  4. The popularity of the work: The popularity of the work can affect its value. A copyrighted work that is widely known and well-liked is likely to be more valuable than one that is not as well-known or well-liked.
  5. The competition: The level of competition in the market for the copyrighted work can affect its value. A copyrighted work that is protected from competition is likely to be more valuable than one that is in a highly competitive market.
  6. The licensing potential: The licensing potential of the copyrighted work can affect its value. A copyrighted work that can be licensed for use in multiple mediums or for a variety of purposes is likely to be more valuable than one with fewer licensing opportunities.
  7. The quality of the work: The quality of the work can affect its value. A copyrighted work that is high-quality and well-regarded is likely to be more valuable than one that is of lower quality or less well-regarded.
  8. The legal standing: The legal standing of the copyright can affect its value. A copyrighted work that is legally sound, and with no disputes or infringement claims, is likely to be more valuable than one with legal issues.

Trade Secret Valuation

There are several factors that can affect the valuation of a trade secret, including:

  1. The uniqueness of the secret: The uniqueness of the trade secret can affect its value. A trade secret that is truly unique and cannot be easily replicated is likely to be more valuable than one that is easily replicated.
  2. The competitive advantage: The competitive advantage provided by the trade secret can affect its value. A trade secret that provides a significant competitive advantage is likely to be more valuable than one that provides a small advantage.
  3. The length of time the secret has been kept: The length of time the trade secret has been kept can affect its value. A trade secret that has been kept for a long time is likely to be more valuable than one that has been kept for a shorter time.
  4. The potential revenue streams: The potential revenue streams associated with the trade secret can affect its value. For example, a trade secret that has potential for licensing, royalties, or other forms of income is likely to be more valuable than one that does not.
  5. The market demand: The market demand for the technology or product that is protected by the trade secret can affect its value. A trade secret that is in high demand is likely to be more valuable than one that is not in demand.
  6. The size of the market: The size of the market for the technology or product that is protected by the trade secret can affect its value. A trade secret that covers a technology or product that is used in a large market is likely to be more valuable than a trade secret that covers a technology or product that is used in a small market.
  7. The level of secrecy: The level of secrecy associated with the trade secret can affect its value. A trade secret that is well-protected and difficult to uncover is likely to be more valuable than one that is easily discovered.
  8. The legal standing: The legal standing of the trade secret can affect its value. A trade secret that is legally sound, and with no disputes or infringement claims, is likely to be more valuable than one with legal issues.

Ultimately, the choice of method will depend on the specific circumstances of the IP and the information available. It’s important to use more than one method to make sure you get an accurate value. The methods can be used simultaneously to arrive at a final value.

Background factors that influence IP Valuation

1. The standard of value

The Fair market value is the most common standard of value. This is essential when valuing IP assets. Fair market value (or Market value) is the price at which an asset/service passes from a willing seller to a willing buyer. Both the buyer and seller must be rational and have reasonable knowledge of pertinent facts. Fair value (Fair Price) is considered appropriate for post-transaction purchase price allocation. It is determined by the assumptions market participants use to price the asset. While fair market value seems more appropriate when it is based on the premise value in exchange, fair values are often based upon the premise value-in-use, as we have already mentioned. IP valuation is used to determine the fair market value for an IP asset.

2. The purpose of valuation

Understanding the purpose of a valuation is essential in order to establish the basis for value calculation. A valuation looking at investment and market value would be entirely different. Market value is the correct premise in commercial situations. International Value Standards define a market as the “estimated value of a property on the date it is valued between a willing buyer or seller, in an arm’s length transaction that has been properly marketed and where both parties have acted with knowledge, wisdom, and without compulsion.” 

3. Valuation methods

The value of IP assets is affected by the method used and the assumptions made when applying a particular valuation method. The market Method is the most effective method of valuation. Companies tend to avoid using the cost method because it doesn’t take into account the unique character of IP. This is a good way to reduce R&D expenses.

4. Strength of IP asset

An IP asset’s competitive strength determines its market value. Its IP value is determined by factors like customer responsiveness, market distribution, and availability of a product/service. The value of IP assets is affected by the threat of new entries or substitutes.

Now over to you

Conducting accurate IP valuations today is more difficult than ever. Your company can rest assured that PatentPC uses the best intellectual property valuation methods. This will reduce the chance of any disputes or penalties.