A unique class of asset that is subject to intellectual property protection is software. The central constructs for software valuation are the identification of the software inventory components, possession by the corporation, and statements of ownership to the components. These are the primary constructs to keep in mind for software valuation. Another important point to remember in valuation of a software product is that only after the market has been established and demand is apparent, the software inventory contains the only assets with value. Then after the market is established current and future revenue of the software product will again be dependent upon these same intellectual asset components. In other words, quality of the software inventory will play an important part in fair and market valuation of software. The reason for this assertion is that software content is varied, as shown in the “Intangible Asset Inventory” figure. When it comes to IP protection of these assets, they can be bundled into “Software IP Packages”, as shown in the figure.
When it comes to valuation of software IP, determine the buyer’s motivation for fair value consideration and determine the amount of bias of the ownership value. Consider the applicability of market or income valuation approaches over ownership value. (Ownership value is the view of value if the owner is deprived of the ability to monetize and/or exclusively use.) Ideally, all three approaches should be considered. However, many valuators prefer the income approach for valuing unique, income-generating properties especially if patents are involved. A cost approach is seldom useful if only patents are to be valued, and the market approach may not be relevant because patents are unique by definition and comparable patents may be difficult to identify.
For an Income-Approach to Software Valuation it is important to separate patent valuation from software valuation if patents are involved. For patents, variations of an income approach to valuing patents can be broadly classified as royalty-based or profit-contribution methods. “Profit contribution” refers to the profit attributable to a patent. “Royalty” refers to the income stream expected by the patent holder under a licensing transaction. Whether a profit contribution or royalty method is more appropriate in a given situation depends upon the premise of value or expected future operations—for example, whether a patent is to be sold separately, used for reserve, or commercialized as part of a going concern. For software, the income approach will be used to look at the revenue derived by licensing the software times the number of licenses less the cost to maintain market share.
For a Market Approach to Software Valuation it is important to determine the motivation for market value consideration and determine the amount of bias of the ownership value. Again, consider the applicability of market or income valuation approaches over ownership value. Ideally, all three approaches should be considered. A market approach is seldom useful if only software is to be valued, and the market approach may not be relevant because software is unique by definition and comparable software products may be difficult to identify.
Another unique class of asset that is subject to intellectual property protection are Standard Essential Patents (SEP’s). These are patents that would be infringed if an industry or government standard were followed. Experts agree that it is most important to remember that just because a patent is declared standard essential, that does not make it one. What really counts is quality, not quantity. There is a real danger that losing sight of this may lead to flawed business, investment and policy decision making.
When valuing a SEP it is imperative to consider four elements. These are Unenforceability, Nondiscrimination, Reasonable Royalty, and Worldwide Conflicts. Unenforceability often comes when a patent owner doesn’t appropriately disclose the SEP to the standards body. Licensees of SEP’s have to be diligent in investigating the behavior of prior patent owners in this regard. Nondiscrimination comes about when licensors try and withhold licensing to competitors. However, IP policies say RAND applies to license terms and art must be licensed to all applicants. Nondiscrimination means what it says, all applicants have to be treated the same, irrespective of size or other attributes. RAND Royalty rates are typically determined by percent SEP count of the company over the total SEP count. It is important to note however that RAND law is still developing, with differing approaches and outcomes. Worldwide Conflicts refers to the court decisions in various countries. Courts hearing essentially the same case come to different outcomes. This makes valuation of SEP art difficult and variable. It is best done by solid subject matter experts.