Accuracy Versus Cost of Valuing Patents

Each of the three major methods for valuing patents has their own strengths and weaknesses. In the “Accuracy Versus Cost of Valuing Patents” figure the trade-off between the two can be seen. Although the X scale for time may be accurate for organizations with lots of valuation experience, many companies will find that the units are extended out, ranging from hours, to days, to months. The important thing to realize is that when valuing intellectual property for various purposes, the time available before a decision must be made can unfortunately affect the methodologies utilized.

S-curve’s Impact on Valuing Patents

Likewise a typical method used to value patents is related to the technology’s placement on the business or technology S-curve. A shown in the “S-curve’s Impact on Valuing Patents” figure, early stage patents are primarily valued on the basis of cost. This is because no market information is yet available for breakthrough products, and income methods have notoriously inaccurate assumptions. Later on, as the market starts to develop, the income methods become much more robust because of the experience with both the technology commercialization and market uptake. Late in the maturity curve when many competing technologies enter the market, the market-based method becomes the easiest and most robust method for evaluation.

For some regulatory requirements the particular method of valuation is not directly specified. For example, Sarbanes-Oxley and FSAS 1 41 & 142 requirements require that with respect to valuation each part of the portfolio be valued. They also require identification of how the value was measured and who measured the value. Given that different valuation methodologies require different amounts of time and effort to create and that in general the valuation methodologies tend to give values higher or lower vis-a-vis one another, careful selection of valuation methodologies for regulatory use is an important corporate decision. Typically when valuing IP for regulatory purposes the corporation’s or entity’s accounting and legal staff should drive the valuation process.