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

4

$12,500 million $4,500 million $300 million $590 million $80 million $450 million

$160 million

[IPO]

$159 million $90 million $40 million

Glenacres Electronics

$8 million

[Various]

$300 million

$228 million

Buyer/Acquirer

Seller/Acquiree

Deal size

$1,060 million $550 million $120 million $75 million $375 million

Note: The trademarks are the property of their respective owners

Why is your board interested?Deals Becoming Mainstream and Significant

5

Why is your board interested?

• 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.

Business Books:

6

Enterprise Risk Management (ERM)

• 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

Why is ERM relevant to IP Monetization?

7

Enterprise Risk Management

• 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? Cross-licensing?

• How do you conduct due diligence on the licensees? Know who you are transacting business with, beyond financials.

Risk Considerations

8

How to monetize IP? Main Strategies

• Patents and/or other IP• Possibly in conjunction with R&D agreement

Technology Licensing

• Unused patents (typically)• Grantback license to seller for future usePatent Sales

• Value extraction from unlicensed users• A/k/a “stick” licensing

Patent Assertion

• Earlier stage technology (typically)• Equity stake in lieu of cash (typically)

Third Party Incubation

9

What are the 5 Key Steps?Key Steps

Benchmark Develop the Organization

Detailed Inventory

and Prioritization

Develop Processes Execute

10

Key Step #1: Benchmark

• Best-in-class monetization entities• Comparables• Others

– VC/PE

Targets

11

Key Step #1: Benchmark

• 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

Exemplary Findings

12

Key Step #2: Develop the Organization

• 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

Mission Statement -- Examples

13

Key Step #2: Develop the Organization

Structure – Example

VP

Technology Business Development Licensing Legal

14

Key Step #2: Develop the Organization

• Owner– CFO, CTO, CLO, other?

• Interaction with other functions / shared services– Finance/Accounting/Tax– M&A– R&D

• Cost center or P&L?• Steering committee

– C-Suite participation– Company-wide commitment

Structure – Other Considerations

EngineeringLegal

Marketing Finance

Business development

15

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

16

Key Step #4: Develop Processes

• 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

Considerations

17

Key Step #5: ExecutePipeline development is key

Technology Licensing

Patent Licensing

Patent Sale/Assignment

Third party incubation

6 to 24 months

6 to 12 months

6 to 24 months

Shortest time to revenue

12 to 48 months

Higher risk/reward; Preferred by VC/PE companies

Royalty tail; joint R&D

Cross licenses; most often coupled with tech licensing

18

Opportunity and Pipeline Tracking

Number of opportunities

Concept initialization

Opportunity identification

Opportunity qualification

Customer discovery

Customer engagement

Bid submitted

Negotiations Deals won

Total value of opportunities ($M)

Backlog: Tracks future IP income streams for deals signed over multiple years.

2012 Total value of opportunities ($M)

Key Step #5: Execute

19

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

20

• 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

Additional Considerations - IP valuation

21

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

Final Thoughts

22

Questions?

Thank You!