How does the industry value a patent or a patent application? The short answer is “it depends”. It depends on several factors, such as the type of industry your invention is in (ie, a new drug patent will be valued differently than a new software patent). However, there are some fundamental valuation techniques that are used in all industries. The two most common are:
1. Estimated Future Income (also called Discounted Cash Flow or “DCF”)
2. Market comparables or “market offsets”
Let’s start with the income approach or DCF since it is a bit more complicated. This valuation approach tries to estimate how much revenue your patent will generate over its life (usually 20 years). There are many things that go into this calculation such as;
-market size and growth rate (how many customers are there in years 1-20?)
-market penetration (how many of these customers will buy your product?)
-market penetration curve (will more customers buy your product as your brand grows?)
-costs (how much does it cost you to produce your product?)
-taxes
-net income (essentially your profit per year)
– discount rate (this takes into account risk and the time value of money)
Essentially, you can use the above categories to create a spreadsheet that projects the amount of profit (net income) your invention is expected to generate over the life of your patent. It then uses the discount rate, which is a percentage like 10% that represents risk and the time value of money (since a dollar earned 20 years from now is less valuable than a dollar earned today). You use all of these numbers to calculate the estimated value of your invention in today’s dollars. This is called Net Present Value or NPV, and investors love to talk about NPV.
Don’t worry! There is an easier method.
The market comparison method or “market offset” should be familiar to most of you, as it is what is commonly used to price your home or a portion of your home correctly. Just like you can value a house based on how much a similar house in the neighborhood sold for, you can do the exact same thing with a patent. When looking at a house, you would have to take into account things like; square footage, number of bedrooms, lot size, etc. When valuing a patent based on a comparable, you would have to look at the actual deal or transaction that took place. Was it the deal for world rights? How long was it? Was it an exclusive deal or a non-exclusive deal?
It’s highly unlikely that you’ll find an exact match for your patent or the type of deal you’re trying to make, but sometimes you can get close enough to put an approximate value on your patent. So where do you find these compositions? Unfortunately that’s the hard part. There are companies that will sell them to you at a high price and consultants that will charge you to do this work. If you want to try to find some yourself, one method I use is to try to find the terms of the agreement from publicly available sources, such as US SEC filings. All public companies must file financial documents with the United States Securities and Exchange Commission, or SEC. Often these filings will include patent purchases or patent license agreements. So if you can identify some public companies in the area of your invention, you can access their SEC filings and search for terms like “patent,” “license,” or “royalties.”
Another method is to do very specific Google keyword searches for “company name + license agreement” or “company name + royalties.” If you play around with Google long enough, you’ll eventually come across some patent buyouts or license agreements that you might find useful. This takes some time and practice to master.
A third option is to check the company’s press releases. Often companies involved in a patent license or sales agreement will publish this information as a press release. Your Google search should pick them up, but sometimes it doesn’t.
As you can see, there are several ways to value a patent or patent application. It shouldn’t matter which method you choose, but you should at least use one of them. It’s always good to have solid data and reasoning behind why you think your patent or invention is worth a certain value.