Home > Topics > Evaluation and Valuation of Technologies > Pricing the Intellectual Property of Early-Stage Technologies: A Primer of Basic Valuation Tools and Considerations > Editor's Summary, Implications and Best Practices

This chapter discusses approaches to arriving at a price or pricing formula for inventions that is satisfactory to both the seller (the licensor) and the buyer (the licensee). Technology licensing is essentially a commercial transaction between a supplier (licensor) and a reseller (licensee). The reseller should be reasonably confident that he will be able to turn around and resell the technology (or something made with it) at a profit.

This chapter introduces the main methods of valuation and pricing technologies. The value of a technology depends upon how it is used, how much it cost to develop, how long it will take before its sales generate returns, and the probability that the technology will be commercially successful. The pricing, on the other hand, refers to the price a buyer and seller agree upon. This may be in up-front payments (in cash or equity) or deferred royalties, or a combination of both.

Many things can be transferred between a licensor and licensee: IP rights, technical data, rights over improvements to the technology, rights to sublicense the technology, costs related to the patenting process, etc. The price that the licensee pays to the licensor can consist of any combination of various types of payments, including running royalties, fixed payments, common stock (equity), R&D funding, lab equipment, consulting services, grant-backs, or access to other proprietary resources. The licensing contract should make allowances for the risks that the licensee will have to take in developing and commercializing the technology. A combination of royalties and equity stakes is a particularly effective way in splitting the risk between the two parties. If a technology does not deliver, then the seller only receives the equity stake and the buyer does not need to pay any future cash. On the other hand, if the technology is highly successful, the buyer will have accessed the technology without foregoing important cash that may have been crucial in bringing the technology to the market and the seller gains in higher royalties and higher value of the equity.

Another way to distribute the risk fairly is by discounting the expected returns with an appropriate hurdle (or milestone) rate. Alternatively, the structure of payments may be adjusted over time as a function of reaching certain milestones. Picking appropriate hurdle or milestone rates or individual payments can be aided by explicitly modeling how different stages or factors in the development process contribute to the overall expected returns and/or to the risk of not realizing those returns.

This chapter explains the fundamentals of technology valuation and pricing.

• Each licensing transaction is unique. There is no “right” price for any given technology.
• The sources of any value that might be created by the technology lie somewhere in the future.
• The future sources of value depend upon the innate economic benefit that can be captured from using the technology in some market.
• The value of a technology is dependent upon many factors, any of which may change at any moment. There may only be a small window of time in which a technology can turn a profit.
• Early-stage technologies are risky. They may or may not turn out to be profitable.
• The more information that one can gather about the possible market value, and possible risks, of a technology, the easier it will be to valuate it and the more accurate the valuation will be. Unfortunately, such information is not available from the outset.
• Most early-stage technologies end up being of little or no commercial value; a rare few turn out to be of immense value.
• Pricing a technology requires negotiation and compromise between licensor and licensee. Both parties will naturally try to get the best deal they can for themselves.
• Pricing a technology is a slow process. In order for it to be done properly, all of the relevant information has to be gathered.
• The bargaining position of the licensor weakens as the technology ages and its patents approach their expiration date. Conversely, the bargaining position of the licensee increases as their contribution and the importance of their role in capturing value with the technology grow.
• Because of the inevitable shift in bargaining power from the licensor to the licensee, prices or royalties can be renegotiated downward, but not upward.
• There are methods practiced by technology-transfer and business-development professionals that can be used to guide the process.

Sometimes the value of a technology for a licensee is the savings of the costs that it would instead take to work around the technology position. Sometimes the value of the technology for the licensee is the degree of risk that the technology eliminates.

Risk is subjective, and each party will perceive it differently. Certain events may reduce the licensee’s perceived risk, such as additional testing of the technology by the licensor or by a government R&D grant awarded to the licensee, or a collaborative venture between the licensee and other R&D institutions.

Pricing is never completely objective, either. The important thing is to find a price that is acceptable to both parties and that encourages the licensee to invest in the development of a technology that may end up bringing great benefit to the public.

Key Implications and Best Practices

Given that IP management is heavily context specific, these Key Implications and Best Practices are intended as starting points to be adapted to specific needs and circumstances.

For Government Policymakers

• Governments should be very cautious and not impose certain valuation approaches nor specific values and terms of licensing and spinout terms. Each deal is highly context specific and the more government and institutional policies are prescriptive, the less original and beneficial deals can be worked out.
• Public-sector R&D creates investment opportunities for private-sector businesses. Governments have a major role to play in making technology transfer less risky and more attractive for licensees with various policies (such as government R&D grants, specific subsidies, encouragement of clusters, financing of business incubators) or offer complementary R&D inputs, or regulatory requirements that are conducive to the emergence of new technologies.
• There is no “right” price for an early-stage technology. However, it is possible to make it easier to efficiently and fairly price of technologies, perhaps by making information about similar transactions publicly available or by providing professionals who are experienced in valuation methodologies.

For Senior Management (university president, R&D manager, etc)

• Royalties and equity stakes distribute the risks of developing a technology between the licensor and licensee.
• The process of pricing technology can be assisted by probabilistic modeling software. The most effective software often costs quite a lot and may not be a good investment if fewer than 100 or so deal are made per year. Quite often the best approach is to get as many licenses completed in as short a period of time, even if an individual license does not provide you with the maximum possible income. The more licenses, the higher the probability that one or a few will really lead to success.
• A public sector institution’s intellectual property rarely becomes a major source of income.

For Scientists

• Additional R&D by the licensor may appear to increase both the likelihood of success and the economic value of a license. But this is only true if the R&D is aimed toward reducing the risks of commercializing the technology. Basic R&D may do little to reduce the risks of commercializing the technology.
• The commercial value of an invention is almost always independent of the potential market of that invention. Royalties reward the commercial value, and not the scientific value, of an invention. Technology licenses, however, may provide you with follow-on grants and other intangible incentives to conduct further research.
• The best approach by your technology transfer office is usually to get as many technology/inventions licensed as early and as fast as possible. This often means that for a specific license, the maximum possible income (in up-front payments or royalties) will not be obtained as such negotiations would take much more time, attention and resources. Yet overall, you and your institution is generally much better off when many licenses are completed within a few months as the likelihood of one or a few yielding major income increases with this approach.

For Technology Transfer Officers

• Be flexible when pricing a technology. Early-stage technologies is always a risky proposition, for both you and your licensee. Your potential licensees probably have other licensing prospects: find out what their alternatives are if they turn down your offer.
• You will usually only hear (or primarily hear) the bad news about a product; some of it may be true, and some of that may even be relevant.
• The process of pricing technology can be assisted by probabilistic modeling software.
• When valuating and pricing IP, take into account the IP to be licensed, the scope of the license, the nature of any diligence (or milestone) requirements, and the payment structure.
• The process of pricing technology can be assisted by probabilistic modeling software. The most effective software often costs quite a lot and may not be a good investment if fewer than 100 or so deal are made per year. Quite often the best approach is to get as many licenses completed in as short a period of time, even if an individual license does not provide you with the maximum possible income. The more licenses, the higher the probability that one or a few will really lead to success.