What Do You Do When Your Board of Directors Wants to Monetize Your Intellectual Property Assets? Thursday, October 30, 2014 Panel: Panagiota Dafniotis, Sri Divakaruni, Brian J. Hamilla
The views and opinions expressed by the panel members in this presentation and commentary are their personal views and do not necessarily reflect those of their employers.
Outline Introduction Why is your Board Interested in Monetizing IP? Taking a Step Back - Enterprise Risk Management How to Monetize? Main strategies What are the Key Steps? Additional considerations and final thoughts
Why is your board interested? Deals Becoming Mainstream and Significant Buyer/ Acquirer Seller/ Acquiree Deal size $12,500 million $4,500 million $300 million $590 million $80 million $450 million [IPO] Glenacres Electronics $228 million $160 million $159 million $90 million $40 million $8 million [Various] $300 million $1,060 million $550 million $120 million $75 million $375 million Note: The trademarks are the property of their respective owners 4
Why is your board interested? Business Books: Edison in the Boardroom Revisited: How Leading Companies Realize Value from Their Intellectual Property. Suzanne S. Harrison & Patrick H. Sullivan (2011). Burning the Ships: Transforming Your Company's Culture Through Intellectual Property Strategy (2009). Marshall Phelps & David Kline. Rembrandts in the Attic: Unlocking the Hidden Value of Patents (1999). Kevin G. Rivette & David Kline. 5
Enterprise Risk Management (ERM) Why is ERM relevant to IP Monetization? Imperative to evaluate holistically your entity's circumstances before embarking on IP monetization Critical challenge for a board is determining how much risk to accept in effort to create value Uncertainty in IP monetization presents both risk and opportunity, with the potential to erode or enhance value Multiple monetization approaches that should each be considered 6
Enterprise Risk Management Risk Considerations Is the board prepared to invest the personnel and financial resources required to develop this program? What strategy for monetization to consider? What is the calculus for ROI with projected spend? What reputational or business risks exist exist? How do you value? How do you monitor? Ability to monitor licensee quality? Control for your brand? Quality assurance, samples, mar com review, spot checks. Attract critical attention to your patent portfolio? Crosslicensing? How do you conduct due diligence on the licensees? Know who you are transacting business with, beyond financials. 7
How to monetize IP? Main Strategies Technology Licensing Patent Sales Patent Assertion Third Party Incubation Patents and/or other IP Possibly in conjunction with R&D agreement Unused patents (typically) Grantback license to seller for future use Value extraction from unlicensed users A/k/a stick licensing Earlier stage technology (typically) Equity stake in lieu of cash (typically) 8
What are the 5 Key Steps? Key Steps Benchmark Develop the Organization Detailed Inventory and Prioritization Develop Processes Execute 9
Key Step #1: Benchmark Targets Best-in-class monetization entities Comparables Others VC/PE 10
Key Step #1: Benchmark Exemplary Findings Monetization takes time 2-3 years to break even 2 to 4% of EBIT possible at steady state Technical support important Often necessary Value add to deal Proceeds to IP owner Preferably to fund additional R&D 11
Key Step #2: Develop the Organization Mission Statement -- Examples Increase ABC s organic growth by finding licensing opportunities for its technologies in alternative applications Utilize third party incubation to introduce ABC s technologies to new market verticals Develop a licensing program to promote the adoption of ABC s technology by others in the business 12
Key Step #2: Develop the Organization Structure Example VP Technology Business Development Licensing Legal 13
Key Step #2: Develop the Organization Structure Other Considerations Owner CFO, CTO, CLO, other? Interaction with other functions / shared services Finance/Accounting/Tax M&A R&D Engineering Cost center or P&L? Steering committee Marketing C-Suite participation Company-wide commitment Business development 14 Legal Finance
Key Step #3: Detailed Inventory & Prioritization Identify & categorize Databases Interviews Brainstorming Establish filtering criteria Valid hypothesis Proven technology Resident experts Prioritize the list Low hanging fruit Mix of opportunities 15
Key Step #4: Develop Processes Considerations Draw from existing processes in your business E.g. phase-gate project management process, new product development process Provides familiarity to a new endeavor Revise when appropriate Establish clear deliverables and success criteria Allows for objective decision making Discipline still required to table/end projects 16
Key Step #5: Execute Pipeline development is key Technology Licensing 6 to 24 months Patent Sale/Assignment 6 to 12 months Patent Licensing 6 to 24 months Third party incubation 12 to 48 months Royalty tail; joint R&D Shortest time to revenue Cross licenses; most often coupled with tech licensing Higher risk/reward; Preferred by VC/PE companies 17
Key Step #5: Execute Number of opportunities Opportunity and Pipeline Tracking Concept initialization Opportunity identification Opportunity qualification Customer discovery Customer engagement Bid submitted Negotiations Deals won Total value of opportunities ($M) 2012 Total value of opportunities ($M) Backlog: Tracks future IP income streams for deals signed over multiple years. 18
Additional General Considerations IP monetization as a business model - Opportunistic vs. Systemic, predictable IP income Corporate patent strategy Role of IP in M&A Pre- & post-divestiture processes Financial accounting considerations Leveraging Research vs. Business Unit staff Differences in intangibles in commercial vs. defense Protection of IP in emerging markets Legal trends impacting IP monetization Key: estimate risk adjusted economic value to licensee 19
Additional Considerations - IP valuation Estimate economic value from licensee s perspective Examples of economic value: higher revenue, lower cost, time to market, market share advantages Consider value to market leader vs. followers Adjusting for IP risk - Historic revenue: litigation risk - Future revenue: litigation + technology risk Evidence of use key to patent licensing valuation Sunk cost to develop technology: interesting; not relevant Aligning interests with licensee: upfront fee + royalties 20
Final Thoughts Deal negotiation elements for consideration IP licensing: art + science no two deals are identical Carrot vs. stick: former better for the long haul Leading with market leader vs. followers Foreground IP ownership Exclusivity vs. leveraging field of use restrictions Useful constructs: 1+ 1 > 3; splitting the orange; growing the pizza Good practice to have patent, technology licensing and Joint R&D agreements to be separate Be aware of IP income recognition guidelines: EBIT vs. revenue Separability in Multiple Element Arrangement deals 21
Questions? Thank You! 22