Monetizing
Intellectual Assets
as a Business
Michael H. Baniak, Partner
Chicago Office
mbaniak@seyfarth.com
Overview
• Is it essential today for companies to be
constantly demonstrating value
generation from their IP assets?
• Investing considerable corporate
resources in Intellectual Property – what’s
my return?
• Incorporating into products – is that
enough?
• External value generation through
licensing/leverage
• Multiple ways in the current environment for generating revenue
• Internal resourcing
• External funding/resource/outsource
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Current IP Trends
• The patent market – particularly for sizable blocks of patents – is fluid
with many transactions happening
• Valuations of patents/portfolios can be challenging
• The patent transaction “market” is not efficient and very immature
• The reality of invention novelty
• Lack of “standards” – can there really be any?
• Patent quality or quantity
• Valuable brands are more straight-forward to license and finance and
collateralize
• Your brand is your most strategically valuable asset
• Internal decision processes generally different
• How do you want your customers to see your brand in the market?
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Current Patent Marketplace
• Patents have become more valuable assets leading to more and not less
focus, and litigation
• Significant 3rd party financial resources have flowed into the Patent Market
• Rarely do companies pay for the use of your patent rights unless there is a
threat of litigation
• Patent litigation is more complex - more expensive – multi-jurisdiction
• Infringement generally “pays” – the results of most litigation is paying a
royalty after the fact
• The lack of injunctions combined with making of damages more difficult
has emboldened defendants/infringers
• As proving damages for plaintiffs has become more difficult, defendants
have become increasingly more bold
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Current Trends in Patent Valuation
• “Quality” and “Quantity” patent rights are being highly demanded
• A lot of $ chasing patents – is it the beginning, middle or end of the
patent purchasing bubble?
• Many unique transactions are occurring:
• Large technology companies selling patents to both established
and establishing patent holding/assertion entities
• Companies are being formed to buy, hold and assert patents
• Hedge fund activity is strong – demand for high returns will come
• Intellectual Ventures goes from largest buyer to largest “troll”
• Found that licensing without litigation wasn’t so easy
• Companies looking to “cash out” on their IP
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Options for External Monetization
• Sale
• Partnership or JV
• Debt
• New Business Models
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Sales and Partnerships
Sale
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Buyer may be strategic or patent
assertion entity (PAE)
• Short-term relationship
• Upfront payment, back-end interest
or hybrid
• Little to no ongoing involvement or
support
• License back
Partnership or JV
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Buyer generally a PAE
Longer-term relationship
Includes some form of continuing
interest
• Percentage of profit or revenue
• Equity
May provide ongoing support
• Access to R&D labs for technical
support and reverse engineering
• Options to acquire additional
assets
Can include control over operations
• Board seat
• Ability to suspend assertion
against some sensitive
customers
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Ecosystem of Patent Monetization
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IP Collateralized Debt
• Short-term loans
• Interest rates around 10-15%
• Typically involve warrants
• Covenants
• Limited ability to enforce IP
• Strict maintenance obligations
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New Business Models
Industry consortiums
Future Innovations?
Contribute portfolio
to create tradable
license rights
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Work with industry
groups pooling funds
to collectively
purchase IP
Exchanges
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Components of Intangible
Assets/ Intellectual Capital
Market Value
Intangible Assets
Knowledge Capital
Intellectual Assets
Intangible
Value
Book
Value
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Intellectual Property
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Key Intellectual Property Assets
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Patents
Copyrights
Trade Secrets
Know-how
Trade Marks/Names
Trade Dress
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Patents Have Become More Valuable
• We have become a knowledge economy
• Patents have become trading commodities and a
common article of commerce
• “Everyone is doing it”
• Markets have placed significant value on company
intangibles
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Measurable Components
of Intangible Assets
• Patents, Trademarks, Copyrights, Trade Secrets and
Know-how generally make up “Intellectual Property”
• Patents, Trademarks, Trade Names, Trade Secrets
and Copyrights can be “measured, documented,
evaluated and valued”
• “Know-how”, “Show-how”, Critical Skills and Key
Personnel are more difficult to “measure” but can be
evaluated and valued
• More difficult to “value” and understand other
intangibles – but referential value and importance can
be determined
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Factors that May Drive Company Value
Generating Capacity from Intellectual Property
• The relevance of the Intellectual Property to the cash
and income generating capabilities of the Company
• The relative protection and exclusivity that the IP
provides
• The sustainable competitive advantages that the IP
provides
• The economic life of the existing IP and the company’s
capabilities to efficiently generate new, important and
relevant IP in the future and bring that IP to market
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Execution Intangibles
Long term value or the difference in market value from
one company to another may not necessarily be the
amount of Intellectual Property or the Capability to
Produce Intellectual Property but rather the Process
Capability to Execute Business Strategies Over the
Medium and Long Term in Concert with the Creation and
Leverage of IP
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Ways of Using or Disposing of IA/IP
“Highest to Lowest Value Potential”
• Use it internally in your own products
• Use it in some type of joint venture
• Use it as “contribution assets” to a new company, start-up or
venture in exchange for an equity position
• License in exchange for $ or for rights to IP such as cross licensing
• Use as collateral for financing
• Defensive positioning
• To have nice plaques to put on the wall
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How Value is Created
Through IP and Licensing
• Value is created when a company invents/establishes an exclusive area
of competitive advantage and exploits it
• Valuable intellectual property is created when it blocks third parties from
a key defined “space”
• Creating intellectual property which is broad in scope and provides
licensing potential both inside and outside of a company’s areas of
business interest
• Out-licensing IP brings in revenue and profit – high margins
• Out-licensing and in-licensing bring in key “technology properties” of
value to the company – acquire unique assets/capabilities
• Value is created when a company establishes a zone of “freedom to
operate” through its intellectual property development
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“Extraction” Strategy Deployment
• What Have You Got For IP Assets in Inventory? – Periodic
Portfolio Evaluation
• “Highest and Best Use” Assessment
• Maintain Exclusivity – Use only internally – Core Asset
• Joint Venture – Its Core but we don’t have all capabilities
• “Embedded” – Part of another deal – “leverage” – does
not stand on its own
• Spinout – The “Equity Play” and/or “It will die here…..”
• License – Income Stream
• Sale – Non-Core Assets –
get value while they are viable
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Considerations for
“Extraction” Strategy Development
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Alignment with Overall Corporate Business Strategy
Alignment with Corporate R&D/Internal Exploitation Strategy
Core vs. Non-Core Technologies
“Product Development” Capabilities
Nature of Your Assets – What have you got?
• Relevant Industry – Growing, Surviving or Dying
• Scope of Licensable Rights
• Revolutionary, Evolutionary or “Alternative”
Available “Licensing Resources” – Current and Future
• Business
• Technical
• Transactional – Scope, Experience and Capabilities
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Capabilities to Create Value
From Your Technology
• Valuable Technology Which Creates
A Clear Competitive Advantage
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Generates incremental revenue
Reduces costs
Creates new line/scope/category of
products
• Highly Capable and Highly
Motivated Workforce
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Risk oriented
Technical and Business Visionary
• Access to a Ready and Available
Source of Reasonably Priced Risk
Capital or Access to Corporate
Internal Funding
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Capabilities To Create Value
From Your Technology (cont.)
• Management Team with Vision and a Clear Understanding of the
Technology
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Skilled in handling strengths of the team to bring product through
development/implementation to the market place
• Low Cost/Efficient Manufacturing and/or Fabrication
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Need return on all assets/activities
• Ready Access to Markets and Customers
• A Solid Business Plan and Implementation Strategy Focusing on
Developing, Making and Selling Products with the Likelihood that
Revenues and Profits will be Generated
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What’s Needed to License a Technology?
Licensable
Technology
Market
People
• A technology champion
• Prior business analyses from a business
and/or technology team
• Scientists to give industry presentations
• Technical publications supporting the concept
• A business proposition that meets a market
need
• Strong technology - market match
• Competitive advantage over alternative
technologies
• Technology in use: “Proven value”
• Large, growing markets for licensable uses
Technology
• Identifiable assets - patents, trade secrets, know how
• Proof of concept - reduction to practice, prototypes
• Identifiable applications within the scope of our rights
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Impact of Stage of Development
on Royalty Rates
Discount Decreases as Technology
Moves Closer to Fully Developed
Technology’s Stage of Development
Source: Stephen A. Degnan and Corwin Horton, “A Survey of Licensed Royalty Rates,” les Nouvelles, June 1997.
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Licensing Process Overview
Technology
Evaluation
• Identify prospective
technologies
• Evaluate completeness
• Evaluate relatedness
Opportunity
Assessment
• Map technologies to
markets and markets to
technologies
• Determine gross business
scope
• Prioritize opportunities
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Program
Development
• Package offerings
• Identify targets
• Develop/deploy
marketing
• Qualify prospects
• Determine initial deal
structure
Negotiation
Contract
Admin
• Refine deal structure
into T’s & C’s
• Iterate T’s & C’s
• Review contracts
• Reach agreement
• Execute agreement
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A Common Theme in Developing
A Successful Licensing Effort
• Licensing is a game of “what does he need” rather than
“what have I got”
• Understanding the scope of the subject intellectual
property
• Understanding how the intellectual property fits into the
“Intellectual Property” or “Technology” marketplace
• External not internal focus
• Understanding the “field” from equivalent technical,
legal and commercial bases
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Two Main Environments for Licensing
1. One time – “I am never going to see you again”
licensing
2. “Relationship Licensing” – We will do other business
together in the future
Both factors come into play and are decision criteria for
both “Opportunity” and “Stick” licensing
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Critical Factors for Licensing Business Success
Regardless of Your Structure – Cultural/Corporate
• Licensing-in is as important as licensing-out
• Access to core assets is critical to long term success
• Clearly understanding your bounds and mandate –
access to enough assets of value to meet or exceed
expectations
• Evolving the culture of your organization
• Cultivate “friends and allies” - licensing is a team sport
• Find a way to cause coordination within the company to
happen
• Involvement in the front end of “asset creation” is
important for long term success and value creation –
partner with the technical and legal groups
• License know-how with patents – often more valuable
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Critical Factors for Licensing Business Success
Regardless of Your Structure – Process/Structural
• Efficient understanding and identification of high value IP assets for
licensing is key – “product development cost”
• Less than 10 percent of licensing is external negotiations – work
hard and early to get internal consensus and reasonable terms
• Constant transactional efficiency improvement – bringing deals to
closure – process and skills development
• Licensing/transactional “portfolio management”
• Develop/acquire an efficient/comprehensive business
development/assessment process
• “Infringement” or “Stick” licensing is different – its likely necessary
but treat it differently – proactively manage the different processes
and expectations
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Critical Factors for Licensing Business Success
Regardless of Your Structure – Financial/Practical
• Money can be made licensing non-core assets, but you
cannot build a “business” around it
• Find “technologies of value” not “value in technologies” learn to say no – drop “low value” technologies quickly
• Avoid “polarity” in negotiations
• Manage financial expectations – fight for reasonable
metrics that are in concert with your mandate, access to
assets, “true portfolio value” resources and stage of
development
• Be realistic about projections and managing
expectations – licensing deals can take a long time to
close
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Not All Licenses are the Same
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Technology package
Grants: non-exclusive or limited exclusive
Field-of-Use: market or technology sector
Geography: world-wide, country-specific
Sub-licensing
Rights to improvements
Consideration: fees, royalties, equity position, grantbacks, other
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Thank You!
Michael H. Baniak
Seyfarth Shaw LLP
131 South Dearborn Street, Suite 2400
Chicago, IL 60603
Direct: (312) 460-5837
Email: mbaniak@seyfarth.com
And with grateful thanks to
Mike Dansky, Capstone Advisory Group
mdansky@captstoneag.com
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