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!