Valuation and Dealmaking of Technology-Based Intellectual Property: Principles, Methods and Tools, 2nd Edition

Preface vii

Disclaimer viii

About the Author ix

Acknowledgments xi

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

Introduction: Technology D-V-D 1

Taxonomy of Technology Licensing 5

High Significance, High Ambiguity Contexts 7

Licensing D-V-D and Innovation 12

Going Forward 23

Notes 23

CHAPTER 2 Risk and Reward 27

Uncertainty 27

Phronesis (Judgment) 31

Technology Uncertainty 32

More on Risk 35

Value and Price 45

Two Final Points on Buying and Selling 48

Notes 49

APPROACH I OPPORTUNITY DISCOVERY 51

CHAPTER 3 Identifying and Prioritizing Technology Opportunities 53

Seller “Opportunity Space” 53

The Technology Box 63

Buy-Side Expressions of Value: The Wheelbarrow 69

Overview of Valuation Methods 71

The Six Valuation Methods 77

Conclusion 81

Notes 82

APPROACH II VALUATION 85

CHAPTER 4 Method 1: Use of Industry Standards for Valuation 87

The Concept and Limitations of “Industry Standards” 87

Sources of Industry Standard Data and Information 97

Survey Results as a Source of Industry Standards Data and Information 98

Proposed or Established Norms 105

Shopped Term Sheets and Price Lists 107

News Sources of License Agreement Information 109

Journals, Proprietary Databases, Reports, and Consultants 118

Published License Agreements as a Source of Industry

Standards 119

Court Cases/Judgments as a Source of Industry Standards 123

Patent Pools 126

Lifetime and Organizational Learning 127

Average Error 127

Concluding Observations and Cautionary Notes 129

Appendix 4A: Outline of Agreement between DuPont and University of Houston 131

Notes 134

CHAPTER 5 Method 2: The Rating/Ranking Method, and Tool 139

Ubiquity of Rating/Ranking 141

Overview of How Rating/Ranking Can Be Used in Valuation 145

Groups and Grouping as a Fundamental Knowledge Forming Process 148

Using Rating/Ranking to Value Technology: Factor Assessment 155

Developing Criteria for Using Rating/Ranking for Valuation of Technologies 162

Illustrations of Applying the Rating/Ranking Method 168

Issues in Interpreting Value from a Rating/Ranking Result 171

Using Rating/Ranking to Value Technology: Classified Value 174

Uses of Rating/Ranking with Approaches and as a General Tool 176

Perspectives on Rating/Ranking as an Approach with Licensing 182

Knowledge, Uncertainty, and Humility 185

Conclusion 189

Appendix 5A: Factors in Pricing License 190

Notes 196

CHAPTER 6 Method 3: Rules of Thumb to Determine Valuation 201

Foundations of Rules of Thumb 203

Cost Savings Example of the 25 Percent Rule 205

Perspectives on the 25 Percent Rule 208

Use of the 25 Percent Rule for Apportioning New Profits 209

Examples of Applying the 25 Percent Rule to New Profits Licensing 211

A Universal Rule of Thumb Chart 222

Other Percent Rule Values 224

Some Misuses/Misapplications of the 25 Percent Rule 225

Other Valuation Rules of Thumb Used (or Have Been Proposed) 226

Summary Points on the Use of the 25 Percent Rule 229

Conclusion 231

Notes 232

CHAPTER 7 Method 4: Discounted Cash Flow Method to Determine Valuation 235

Overview of the DCF Method 236

Basic Financial Concepts 247

Quantification, Classification of Risk 265

An Example Cash Flow Projection from a License 277

Additional Considerations for Calculating DCF 289

Segment and Scenario Analysis 293

Cash Flow Projections 299

Other Issues to Be Considered with the DCF Method 318

Conclusion 330

Sources of Information to Develop Business Projections 331

Notes 331

CHAPTER 8 Method 5: Advanced Valuation Methods 337

Modified Discounted Cash Flow Method 338

Monte Carlo Method 345

Real Option Methods 414

Conclusion 447

Online Resources 448

Appendix 8A: Example Crystal Ball Report for Exhibit 8.18 449

Appendix 8B: Crystal Ball Report Corresponding to the

Results Presented in Exhibit 8.XX for a Double-Humped

Cost Distribution Assumption 456

Notes 464

CHAPTER 9 Method 6: Valuation by Auctions 469

Introduction to Auctions 470

When Auctions are Feasible 471

Auction Examples 474

Auctions as Distinct from Other Types of Dealmaking 479

Auction Strategies for Buyers 489

Auction Caution 490

Conclusion 491

Appendix 9A: Bidder’s Agreement 491

Notes 492

APPROACH III DEALMAKING 495

CHAPTER 10 Approach: Deal Structure 497

Return to the Box and Wheelbarrow 498

Cash When Pricing Structures 502

Cash As Pricing Structures 507

Cash If Pricing Structures 517

Cash Maybe: Options 521

Consideration Forms Beyond Simple Cash 522

Special Form of Cash If: Equity 525

Balancing Simplicity with Comprehensiveness 537

Conclusion 537

Notes 538

CHAPTER 11 People, Process, and Lessons Learned 541

Introduction 541

Deal Team 546

Deal Targets 552

Negotiating Plan 556

Plan B 560

Concluding Advice from Technology Dealmakers 565

Notes 566

CHAPTER 12 In Conclusion 569

Approach of Opportunity Discovery as a Quest 569

Approach of Valuation: A Review of the Six Valuation Methods 572

Approach of Dealmaking 583

Closing Thoughts 592

Website Resources 594

Notes 594

Appendix: List of Abbreviations and Trademarks 597

Bibliography 599

Index 603