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“How the Other Half Lives...”

“How the Other Half Lives...”. Valuation of Intellectual Property in the Commercial Environment April 22, 2002. Understanding the Rules of the Game. Different game? Different rules! Government contracting Litigation Governed by case law Established methodologies to compute damages

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“How the Other Half Lives...”

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  1. “How the Other Half Lives...” Valuation of Intellectual Property in the Commercial Environment April 22, 2002 1

  2. Understanding the Rules of the Game • Different game? Different rules! • Government contracting • Litigation • Governed by case law • Established methodologies to compute damages • Information made available via the legal process • Transactional • Hypothetical negotiation • Typically, only one party’s information is known • Assess other party situation 2

  3. Valuation Methods Cost Approach “Add it up” or cost to replace/design around Market Approach Look to market for comparable transactions Income Approach Quantify future returns 3

  4. Case Example • Perpetual software license • Issue: “What’s the price” • Offer of $12 million • Issue: What rights are being sold? • Use, derivative works, maintenance, upgrades, etc. • Issue: Licensor does not know the value of their own technology • Practical considerations  future obsolescence 4

  5. Market Approach • Comparable transactions • Public sector (SEC disclosures) • Private sector (databases, personal knowledge) • Goal: “Apples to Apples” • Reality: “Apples to Oranges” (not necessarily a bad thing) • Differences may relate to differences in which rights were licensed (use only, derivative works, etc.) • What did we find? • Terms of a variety of deals • Small up front payments • Royalties thereafter (15% - 40% sales) 5

  6. Income Approach • Hypothetical negotiation • Assess value of deal from licensee’s and licensor’s perspective  does it make economic sense? • Assess economic and industry outlook • Important issues • Alternative technology • Ability to design around • Eventual obsolescence • Competitive motivations • Developed licensor financial models and compared with perceived benefits to licensee • Stepped into the shoes of the licensor/licensee 6

  7. “Pulling It All Together” • Offer $12 million • Market Approach: Up front payments plus royalty suggested $48 million • Income Approach: $24 - $40 million depending on assumptions • Counteroffer $48 million • Deal $25 million 7

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