How to Value Your Patent

One of the most important tasks you will carry out as a patent holder is assigning a monetary value for it. This could become necessary for any number of reasons, such as:

• Selling the patent
• Licensing the patent
• Deciding how much equity to give to business partners investing or working with the patent

None of these decisions can be wisely made without first knowing, at least roughly, what your patent is worth. It is not always an easy task, as patent valuation is a somewhat inexact science. However, whether you have a provisional patent, a design patent, a utility patent, or a plant patent, some key principles should be observed.

You should value your patent with an eye toward the size of the market it could serve. If you own the patent to a new kind of baseball bat, you would want to determine the size of the baseball gear market. Consider this the starting point, for without knowing how much money is spent on similar existing products, you have no valid basis for assigning a worth to your own. After all, wouldn’t you agree that whether your market sees $1 million or $50 million in yearly sales, there would be an impact on how much your patent is worth?

One of the benefits of working with a patent attorney is that he or she will have access to comparables, or how much similar patents have been valued at or sold for. It could be that a new baseball bat was patented 10 years ago and valued at $500,000. Now, this does not necessarily mean that your patent is worth exactly that. Market forces change all the time, and the further back that similar patent was valued, the less it should influence that value you assign to yours. (Conversely, the more recently a similar patent was valued, the more that valuation should be heeded.)

Nevertheless, it pays to get a read on how similar patents are being valued rather than arbitrarily plucking an attractive number out of the air and assigning that as your patent’s value.

One major factor that needs to be considered when valuing anything is risk. In this context, a major risk is that someone who buys or licenses your patent will find that it does not hold up in court – that is, that the courts might decide the patent is invalid. How could this happen, you might ask? The website JournalOfAccountancy.com offers 2 possible scenarios:

“If it is discovered after a patent has been issued that the inventors didn’t meet the statutory requirements for obtaining it–for example, if they weren’t the inventors (35 USC section 102(f)), or had published information about the invention or offered it for sale more than one year before the date of application (35 USC section 102(b))–the patent is invalid and substantially worthless.”

Obviously, this is not desirable and any perceived risk of it happening will reduce what someone is willing to pay for your patent. The solution? Consult your patent attorney on ways to investigate the validity of your patent and convey this to prospective buyers. The more you can eliminate the perception of risk, the higher a value you can assign to your patent.

Part 3 of our “Patent Facts and Fiction” series says that a patent does not give you exclusive rights to make your invention, only to prevent others from doing so. But what if making your invention would infringe on someone else’s patent? This type of patent overlap is quite common and could lead to your patent being invalidated by the courts. Work with your patent attorney to investigate if any overlap exists and communicate to prospective buyers or licensees that this will not be an issue. Eliminating this risk will allow you to value your patent higher than if it was left unaddressed.

No matter what you value your patent at, anyone thinking of buying or licensing it will investigate their alternatives. They will look for the “next best thing” and try to figure out if that would be cheaper than your patent. Since they are going to do this anyway, you had might as well figure out in advance and incorporate it into your valuation. Doing so offers you a strategic advantage – namely that if the next best thing is expensive (or there is no next best thing) you can use this as justification for charging more. Of course, if the next best thing is inexpensive or close to what you are asking, this could suggest a need to lower your valuation.

You cannot value your patent in a vacuum, looking for the one, true, “right” value. Rather, you should assign a value by keeping your unique needs in mind. Why are you selling the patent? If you are just looking to cash out fast without a lot of meetings, delays, and deliberations, it might make sense to use a lower valuation. Money today is worth more than money tomorrow, and holding out for a trivially or even substantially higher price may not actually be worth it. Or, maybe it is – the point is that you need to make this decision consciously and not out of egotism or greed.

Keeping these 6 tips in mind will not instantly generate the “right” patent value for you, but it will ensure that whatever value you decide upon is far more realistic and valid than it would have otherwise been.

Valuing intellectual property is no easy task. No matter what kind of intellectual property you own, there are certain bases you need to cover in order to assign a reasonable value to it. It cannot be done on a whim, based on what you feel your patent, trademark, or copyright is worth. As with anything else, your intellectual property is only worth what someone is willing to pay. Obviously, the key then becomes setting a value that is high and convincing. You want potential buyers to feel like the price you have set is commensurate with its true value. In this article, we will explain some of the most crucial steps in setting such a value.

The first step is to get the advice of an intellectual property attorney. The valuing and sale of intellectual property is not like holding a garage sale. There are thorny, complex laws and regulations governing how to assign a value to different kinds of intellectual property. It is not the kind of thing a beginner should try to jump into with no experience or research. Instead, take the time to find a respected intellectual property attorney and spend the money to acquire his services. He will advise you on key considerations, as well as offer advice on how to set a value effectively and legally. Beyond that, he will ensure that any transactions after the fact are documented in a professional, comprehensive way. The importance of this cannot be stressed enough. If your valuation becomes the subject of patent litigation, what will be more comforting: knowing that a licensed attorney stands behind the valuation, or that you concocted it with no professional help? The moral of the story: don’t cut corners on legal advice!

The next step is to assess your intellectual property from an outsider’s point of view. You might think your patent or trademark is the best thing since sliced bread, but you may be looking at it through rose colored glasses. This affects creative people in all fields, not just intellectual property. But before you set a value, you need to take those glasses off and see your IP like a complete stranger would. If someone tried selling you a patent, what are some of the questions you might ask?

- What is the market and market size?

- What are the competitive advantages the patent offers?

- How much will it cost to implement the underlying idea?

- How long before competitors start crowding in?

There is simply no way around these questions, and your valuation must take them into account if you hope to be taken seriously. The more appealing the answers are, the higher your valuation should be. A huge, untapped market with few competitors is more valuable than a marginal niche filled with established players. Again, these are market realities that you cannot ignore. Once you have a rough valuation in mind, it’s time to consult the professionals once more.

You need to research comparable transactions and see what similar intellectual property has sold for in the past. The best way to access this data is through an appraiser, or your intellectual property attorney. Together, you can discuss what you think the value of your IP should be as compared to comparable values. Try to settle somewhere between your own idea of the value and the values of the comparables you research. This is a time-tested formula for valuations that stand up and get taken seriously.

Finally, you need to heed the age-old warning against being greedy. You cannot ask for too much in valuing your intellectual property, or else you will scare off potential buyers. To prevent yourself from doing this, ask yourself some more hard, honest questions:

- How long would it take you to develop this idea yourself? Months? Years? And how much money would it cost on top of your time? Thousands, tens of thousands, even hundreds? Generally, he longer and more expensive this would be, the lower your valuation should be. The other party will still be doing most of the work, and they know it.

- What about unexpected problems or challenges that might come up? Businesspeople are familiar with the maxim that everything is harder than you think and takes longer than you think. Ask yourself whether holding out for a few extra thousand dollars is really worth committing yourself to years of headaches and problems that you can’t even anticipate right now.

The point is that whoever buys your intellectual property will be assuming all of these risks. You shouldn’t lower your value to the ground, but you shouldn’t be overly greedy, either.

If you keep these considerations in mind and execute them in order, you can accurately value your intellectual property. Good luck!

Jay Cross is a staff writer for Idea Buyer LLC which owns and operates http://www.IdeaBuyer.com – The Online Marketplace for Intellectual Property. The site gives inventors the opportunity to showcase their intellectual property to consumer product companies, entrepreneurs, retailers, and manufacturers. You can email him at JayCross@IdeaBuyer.com.