Insights into Patent Valuation

Why should patent-rich companies value their patents?

Because, in many cases, the majority of a company’s value lies in its intellectual property. If you can’t value your patents, you won’t get the values you deserve when negotiating capital raises, patent sales, and licensing agreements of the sales of companies.

David Wanetick discusses how factors such as claims breadth, priority dates, ease of detecting infringement, overcoming invalidity attacks, prior art searches, forward citations, prosecution histories, litigation experience of the patent attorney and examiners’ allowance rates impact patent value.

This session addresses questions such as:

• How many valuation methods should be used when valuing patents? How can one make use of their varying conclusions?
• How can you value a provisional patent application? How can patents enable companies to prosper when they are subject to trade bans?
• Why might venture capitalists prohibit their portfolio companies from enforcing their patents against infringers?

Gain incredible insights into patent valuation from this podcast.

David Wanetick, CEO, Certified Patent Valuation Analyst

David Wanetick is the CEO of IncreMental Advantage and a Managing Director at JD Merit. David has valued thousands of patents. His clients include Fortune 50 companies, emerging growth companies, mid-sized companies, tech transfer offices, national laboratories, venture capital funds and private equity funds.

He runs the Certified Patent Valuation Analyst designation and is the author of seven books.

Accounting/Valuation

Other

Solution Nation

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SHOW NOTES:

00:00:59 – I’m an author of seven books and also the CEO of Solution Nation, which is a platform where Israeli companies can introduce themselves and educate the investment community about their specific companies.

I have expertise in valuing patents and other intangibles, so I valued thousands of patents.

Usually, my valuation work is in the context of transactions. So clients come to us when they want to raise capital or do a licensing deal with their patents or sell their patents, sell their company.

They believe it’s helpful to have a patent valuation report written. I’m also an investment banker with JD. Merritt, which is a boutique investment bank. We sell companies, we work on buy side mandates for other clients. I’m an author of seven books and also the CEO of Solution Nation, which is a platform where Israeli companies can introduce themselves and educate the investment community about their specific companies.

00:09:48 – The Solution Nation book features 62 Israeli companies. All of these Israeli companies have very interesting, very promising, very successful technologies in some cases.

So I wrote a book called Solutionnation. Subtitle is one nation is disproportionately responding to the world’s most intractable problems. So solution nation. The book features 62 Israeli companies. All of these Israeli companies have very interesting, very promising, very successful technologies in some cases.

But all of the technologies addressed in the book are directed towards resolving very serious problems, such as medical problems, famine, droughts, people dying in auto accidents, people dying in fires. So all of these companies are developing or have developed solutions to very serious problems, problems that affect one’s life or terminal problems.

Each company profile consists of three parts. The first part addresses the problem, explains the problem, and makes it clear what the problem is.

The second profile for each company talks about the solution that that particular company is developing or putting onto the market. And then the third part of each company profile consists of pretty hard-hitting questions that investors might want to ask those companies. So these profiles are not tough pieces. They’re analytical pieces in the book. And there are interesting questions that are posed that investors may want to ask a specific company or companies that are similarly situated to the company that was profiled.

00:28:23 – It seems like the formula for reasonable royalties is very simple. It’s the loyalty base times a loyalty rate, so you can claim damages on reasonable loyalties

A lot of patent lawyers think that the only value that patents have is the ability to assert the patent, which means sue somebody if they were infringing it. And that is definitely one source of value. So if you believe, and you can have proof that your patent has been infringed in the past, and maybe currently, you can litigate against that alleged infringer and claim damages. So you would calculate reasonable royalties.

It seems like the formula for reasonable royalties is very simple. It’s the loyalty base times a loyalty rate, so you can claim damages on reasonable loyalties. If you’re losing profits, then you can try to restore the profits that you lost as a result of the infringement. So you can put forth a lost profits case.

So infringement is one way that you can try to capture value. Another value that patents have is that you can get expanded profit margins. If you’re the only one that can put a feature on a product, and there’s a lot of demand for those products with those features, and you’re the only one that has a patent on that particular feature, you can probably charge a higher price, probably attract more customers.

00:34:47 – There are some situations where patents may not help and may even hurt a little bit.

Yes, unfortunately, there’s a lot of reasons why lots of companies should have patents.

But to be honest, there are some situations where patents may not help and may even hurt a little bit. I actually wrote a book called Plight of the Patentee where I talk about a lot of the heartaches that inventors go through along the path of doing their own capital, raising, doing the research, getting a patent and putting a patent protected product in the market.

So there’s plenty of stories in the book apply to the patentee. So to answer your question, yes, there are some situations where it does not help to have patents in some cases. So if you’re selling into a very rigid, conservative industry, like the utilities, sometimes their procurement people are very myopic and say the only thing we care about is costs.

And so we want to compare generic products, generic transceivers or whatever components they buy. And if your product is patented that differentiates, it makes it harder for us to evaluate and we only really care about price. So if you have a patented feature, in that case, it may not help you. But even some very conservative industries are changing.

00:40:16 – So the main thing is a financial benefit. The evaluation report can be looked at as a document, as almost a negotiating tool that the patentee can use to get a more reasonable, more appropriate valuation.

Well, the benefits are higher price, so the benefits are raising more money at a lower valuation, getting a higher loyalty rate, getting other favorable terms and licensing deals. Maybe it’s more upfront money, maybe the licensing will take equity interest in your company.

Maybe the milestones for adjusting the royalty rates will be more favorable to the owner of the patents. So the main thing is a financial benefit. The evaluation report can be looked at as a document, as almost a negotiating tool that the patentee can use to get a more reasonable, more appropriate valuation.

Other benefits include they’ll probably be better negotiators because the report will address other industry developments and present comparables and present models. And a lot of analysis, a lot of argumentation why the value should be at a more reasonable rate that’s more appropriate for the patentee.

There’s also some free consultation that goes with this. Just interacting with a patent analyst ventilates a lot of issues that are important for the upper management to consider in doing a transaction. And of course, we can help structure a transaction and negotiate the transaction as well.

00:48:46 –  This is what we do to ensure we don’t compromise our standards…

And so I tell the client we can stop the engagement here. If you’re not comfortable with my number, I’ll keep the first half of the retainer because I did a lot of work. I deserve to get paid for that.

But we can end the engagement here. A report won’t be written with the low number that you don’t like. You don’t have to pay me the second half of the retainer, and I don’t have to compromise my ethical standards by writing a number that I don’t subscribe to. So that’s one way.

Or I can complete the report and give it to the client. And I tell the client, this very rarely happens. This is very, very rarely. But this is what we do to ensure we don’t compromise our standards. I can give the report to the client, give them all the Excel files and say, paying me the second half of the money because I did my job.

And you can take the report, write in whatever your numbers are. You know, if you want to multiply everything by ten, as you suggested, fine, do that. But just don’t put my name or any of my affiliations on that report.

OTHER RESOURCES:

1) Enhanced Negotiating Strategies: This two-day seminar discusses the most intense negotiating strategies and tactics allowed without violating your ethics or morals

2) Valuation of Emerging Technologies: This seminar provides an in-depth review of more than 20 Valuation Methodologies

3) Solution Nation – The Book: Learn how the world’s most disadvantaged and destitute people stand to benefit from Israeli ingenuity.