Pricing Intellectual Property- The Rule of Eight

It’s exciting when our clients first learn that their intellectual property (IP) is; a) a capital asset and; b) can be capitalized using our sale license-back (SLB) process. Not surprisingly, the next question is- what’s my IP worth? In the case of patents, here’s a benchmark that Carthage Intellectual Capital uses. Multiply the annual research and development (R&D) expenses times eight. The result is a useful first estimate of the value of your total patent IP portfolio. Hence the name, the Rule of Eight.

The Rule of Eight is not a guarantee of IP value. But it reflects the principle that enterprises create IP today to be useful for an extended period of time. Carthage’s experience is that, on average, the financially useful life of IP is around eight years. The number eight is not merely coincidental; the behavior of patent centric companies anticipates it.

Consider the typical company that relies on patents to make, use or sell its goods and services. A patent’s legal life is 20 years from its priority date. It usually takes 2-3 years for the patent office to examine and issue a patent. That leaves an effective legal life of 17-18 years. Because technology improves over time, patent producing companies continue R&D spending to invent the improvements. Once a patent expires, it is logical that a patent reliant company will likely replace it with a new patented invention.

If a company obtains one patent per year as a result of its R&D, it will possess 17 or 18 legally active patents in the course of a similar number of years. The average legal life of the patent portfolio is the sum of the years of remaining patent lives divided by the number of active patents. In our hypothetical, this turns out to be around nine years. A patent investor will want a ‘risk cushion’ on the investment and 10% is a typical allowance. Therefore eight years is a logically consistent estimate of the time in which a patent portfolio is valuable. And eight times the current year’s R&D expense is an approximation of patent portfolio value if used as an asset for a sale and license-back transaction. The Rule of Eight is a helpful tool for disclosing the financial intentions and value of IP to the financial departments of a business and the financial community at large. To discover the value of your company’s IP contact us at Perhaps the Rule of Eight can turn your IP into ‘pieces of eight’.

PS- If this is your first time hearing about the sale and license-back of intellectual property check out to learn more about this revolutionary process that transforms IP into economic gold!

With the Facebook disaster will the wait for IPO be longer?

FACEBOOK FALLOUT: Y Combinator’s Paul Graham Just Emailed Portfolio Companies Warning Of ‘Bad Times’ In Silicon Valley

In the article, Graham warns that the Facebook disaster means extended waits for all companies thinking of going public until  the market is attractive to IPOs again.

So what about the mezzanine-stage tech company with products, revenues, and a need for capital to grow? Consider the new concept developed by Carthage Intellectual Capital Management: a sale/license-back of its patent portfolio. Monetize your patents by selling them for needed capital and, in return for an annual fee, get a license back to use them just as before.

The concept is similar to a sale/leaseback of real estate, equipment, or software. The cost of capital is less than equity and the capital more available with less onerous terms than with a bank loan. There are tax advantages for the company–use the NOL that’s probably on your balance sheet and pay fully tax expensed license fees. And, should the company be willing, there is potential upside to company and investor through out-licensing in non-competitive fields of use of geographical area.