Valuation and Dealmaking of Technology-Based Intellectual Property

Dr. Richard Razgaitis is a Senior Advisor at CRAI, an international consulting firm providing expertise in economics, finance, and business strategy. He has over thirty years of experience working with the develop-ment, commercialization, and strategic management of technology, more than twenty-five of which have been spent specializing in the commercialization of intellectual property. He has negotiated numerous commercialization agreements with clients in the United States, Europe, and the Far East, ranging from Fortune 500 to small startup companies and is the author of four books on valuation and negotiation/dealmaking published by John Wiley and Sons.

• Preface viiDisclaimer viiiAbout the Author ixAcknowledgments xiChapter 1 Introduction to Opportunity Discovery, Valuation, and Dealmaking 1Introduction: Technology D-V-D 1Taxonomy of Technology Licensing 5High Significance, High Ambiguity Contexts 7Licensing D-V-D and Innovation 12Going Forward 23Notes 23Chapter 2 Risk and Reward 27Uncertainty 27Phronesis (Judgment) 31Technology Uncertainty 32More on Risk 35Value and Price 45Two Final Points on Buying and Selling 48Notes 49Approach I Opportunity Discovery 51Chapter 3 Identifying and Prioritizing Technology Opportunities 53Seller “Opportunity Space” 53The Technology Box 63Buy-Side Expressions of Value: The Wheelbarrow 69Overview of Valuation Methods 71The Six Valuation Methods 77Conclusion 81Notes 82Approach II Valuation 85Chapter 4 Method 1: Use of Industry Standards for Valuation 87The Concept and Limitations of “Industry Standards” 87Sources of Industry Standard Data and Information 97Survey Results as a Source of Industry Standards Data and Information 98Proposed or Established Norms 105Shopped Term Sheets and Price Lists 107News Sources of License Agreement Information 109Journals, Proprietary Databases, Reports, and Consultants 118Published License Agreements as a Source of Industry Standards 119Court Cases/Judgments as a Source of Industry Standards 123Patent Pools 126Lifetime and Organizational Learning 127Average Error 127Concluding Observations and Cautionary Notes 129Appendix 4A: Outline of Agreement between DuPont and University of Houston 131Notes 134Chapter 5 Method 2: The Rating/Ranking Method, and Tool 139Ubiquity of Rating/Ranking 141Overview of How Rating/Ranking Can Be Used in Valuation 145Groups and Grouping as a Fundamental Knowledge Forming Process 148Using Rating/Ranking to Value Technology: Factor Assessment 155Developing Criteria for Using Rating/Ranking for Valuation of Technologies 162Illustrations of Applying the Rating/Ranking Method 168Issues in Interpreting Value from a Rating/Ranking Result 171Using Rating/Ranking to Value Technology: Classified Value 174Uses of Rating/Ranking with Approaches and as a General Tool 176Perspectives on Rating/Ranking as an Approach with Licensing 182Knowledge, Uncertainty, and Humility 185Conclusion 189Appendix 5A: Factors in Pricing License 190Notes 196Chapter 6 Method 3: Rules of Thumb to Determine Valuation 201Foundations of Rules of Thumb 203Cost Savings Example of the 25 Percent Rule 205Perspectives on the 25 Percent Rule 208Use of the 25 Percent Rule for Apportioning New Profits 209Examples of Applying the 25 Percent Rule to New Profits Licensing 211A Universal Rule of Thumb Chart 222Other Percent Rule Values 224Some Misuses/Misapplications of the 25 Percent Rule 225Other Valuation Rules of Thumb Used (or Have Been Proposed) 226Summary Points on the Use of the 25 Percent Rule 229Conclusion 231Notes 232Chapter 7 Method 4: Discounted Cash Flow Method to Determine Valuation 235Overview of the DCF Method 236Basic Financial Concepts 247Quantification, Classification of Risk 265An Example Cash Flow Projection from a License 277Additional Considerations for Calculating DCF 289Segment and Scenario Analysis 293Cash Flow Projections 299Other Issues to Be Considered with the DCF Method 318Conclusion 330Sources of Information to Develop Business Projections 331Notes 331Chapter 8 Method 5: Advanced Valuation Methods 337Modified Discounted Cash Flow Method 338Monte Carlo Method 345Real Option Methods 414Conclusion 447Online Resources 448Appendix 8A: Example Crystal Ball Report for Exhibit 8.18 449Appendix 8B: Crystal Ball Report Corresponding to the Results Presented in Exhibit 8.XX for a Double-Humped Cost Distribution Assumption 456Notes 464Chapter 9 Method 6: Valuation by Auctions 469Introduction to Auctions 470When Auctions are Feasible 471Auction Examples 474Auctions as Distinct from Other Types of Dealmaking 479Auction Strategies for Buyers 489Auction Caution 490Conclusion 491Appendix 9A: Bidder’s Agreement 491Notes 492Approach III Dealmaking 495Chapter 10 Approach: Deal Structure 497Return to the Box and Wheelbarrow 498Cash When Pricing Structures 502Cash As Pricing Structures 507Cash If Pricing Structures 517Cash Maybe: Options 521Consideration Forms Beyond Simple Cash 522Special Form of Cash If: Equity 525Balancing Simplicity with Comprehensiveness 537Conclusion 537Notes 538Chapter 11 People, Process, and Lessons Learned 541Introduction 541Deal Team 546Deal Targets 552Negotiating Plan 556Plan B 560Concluding Advice from Technology Dealmakers 565Notes 566Chapter 12 In Conclusion 569Approach of Opportunity Discovery as a Quest 569Approach of Valuation: A Review of the Six Valuation Methods 572Approach of Dealmaking 583Closing Thoughts 592Website Resources 594Notes 594Appendix: List of Abbreviations and Trademarks 597Bibliography 599Index 603