Carnegie Mellon University UTEN Training Week Aveiro, Portugal May 10 11, 2011
Deal Valuation and Structure
Deal Valuation and Structure Everyone knows Value is a price agreed upon by a willing buyer and a willing seller.
Deal Valuation and Structure Economic Terms of a License: Technology Valuation Economic Structure of the License Payments (Amounts and Timing)
Technology Valuation Somewhere to start Defensible position Counter offer Reality check What is the Purpose?
Technology Valuation Valuation methods fall into three categories: COST MARKET INCOME
Cost Methods Book (Price Depreciation) Not Relevant to Technology Transfer Cost/ Cost Plus Bad Idea (in our opinion) Replacement Cost Useful in Certain Circumstances
Cost Methods Does Cost = Value? Define cost in a university setting Project cost? Salaries? Overhead?
Cost Methods Cost /= Value Students? Know how? Background? Patents? University is not a contractor How will Licensee price the resulting product?
Cost Methods Useful when: Replacement Cost Technology consists of Code/ Copyrights No Patents Can be recreated by outside individuals available to licensee, OR Equal/ acceptable alternatives are available Basis: Man hours to recreate Price of alternative
Market Methods Industry Standards/ Comparables Rating/ Ranking Rule of Thumb Auctions
Market Methods Industry Standards/ Comparables Useful when: Similarity of technology category, stage Availability of comparables Sources: Publicly available databases free or otherwise SEC Data (EDGAR) Historical university data (your or colleagues) Surveys/ Studies (ranges) Experts Experience
Market Methods Useful when: Rating/ Ranking Beginning with a group of comparables Technology of interest is not an exact match A number of factors need to be considered (e.g. stage, market, contribution, IP strength, etc.) Method Develop a scoring system across a number of the most important factors (rank) using existing comparables Apply to new cases (total score) Relative difference is applied to overall valuation
Market Methods Useful when: Rule of Thumb General information is available Specific information is not available It is possible to observe and apply trends Desire to apply method widely Based on: Apportionment/ contribution of effort/ value between buyer and seller Contribution of university s efforts to final product value
Market Methods Special Case of the 25% Rule Reasonable contribution of research/ IP to final product value 25% Rule in Action Total Value created = margin (profit) Value contributed by university = 25% (margin) Data Sources Industry averages (Ibbotsons) Company annual reports/ margins for similar products
Market Methods Auctions Pure market valuation Useful when: One seller and many potential buyers/ licensees Exchange is discrete (e.g. patent) All bidders have equal access to information Price is the only priority Auction Process Solicitation of bids Highest bid wins
Income Methods Net Present Value Risk Adjusted NPV Monte Carlo
Income Methods Net Present Value Discounted Cash Flow A = B/(1+k) n Or, use Excel Basically the present value (PV) of a stream of income over time k = discount rate/ cost of capital/ risk factor
Income Methods Useful when: Net Present Value Calculating the present value of an expected royalty stream (i.e. royalty buyout) Estimating the present value of future product revenue stream (total value contribution factors still apply) Setting fixed fees (e.g. annual minimum royalties, upfront payments) k can be reasonably estimated (30% typical for R stage technology) Information on future revenues can be estimated
Income Methods Risk Adjusted NPV k is adjustable (lowered) over time as milestones are met (development is de risked) Useful for Technologies with especially long development timelines where NPV = 0
Income Methods Useful when: Monte Carlo There are equal probabilities of more than one outcome Such probabilities are unequal, but can be estimated NPV accomplished through programs designed to ascribe randomness to fixed data points within certain probable parameters Layman s approach to Monte Carlo: Develop conservative, realistic, and optimistic models with ascribed probabilities
Technology Valuation Most Used (and Useful) Tools NPV with Contribution Comparables Rules of Thumb Discount Rates/ Rates of Return/ Risk Factors All are used, often in combination Choosing a method is very context dependent Reality checks are critical
Technology Valuation Stage of Development Size of market Contribution Factors Effecting Valuation Scope (incremental improvement or platform technology) Additional investment needed to bring the technology to the market Industry margins
Technology Valuation Field of use Scope of grant Availability of alternative Strength of IP Tacit Knowledge Factors Effecting Valuation
License Structure Factors Effecting Structure Business Model of Licensee Time to Market Scope of License Grant Preferences of Licensee Royalty % of sales vs. annual fee Preferences of university Is buyout ok? Is equity acceptable?
License Payments Basket of Possible Payments Royalties Upfront payment Annual minimum or fixed payments Milestone (event tied) payments Termination fee Expense (patent) reimbursement Sublicense fees/ royalties Equity
License Payments Considerations Distribution of value over payment types Upfront payments highest value (PV) Royalties share risks and rewards Annual fees useful for improvements, combination products, technologies with near perfect alternatives, and instances where contribution % is difficult to assess Costs (patents) should always be reimbursed Sublicenses should be accounted for Milestone payments for long development time Trade offs between price and timing
Fixed Price Licenses and Equity Considerations
Fixed Price Licenses and Equity Fixed Price Licensing Special Case of Start-ups Equity and It s Implications
Fixed Price Licensing Useful for: Multiple Licensees for one or similar technology(ies) Non exclusive licensing strategy Narrow field of use Information is perfect and accessible to all Information is scarce / inaccessible Information is shared across licensees
Start ups Why use fixed price? Information is scarce Licensees/ investors/ entrepreneurs will talk Valuation is difficult/ impossible/ wrong Pros: Expectations are set/ known Less time to close Less investor renegotiation Cons: Will overprice some/ underprice others
Start ups 3 Examples of Fixed Price Licenses CMU 5% and go in peace Carolina Express U of Hawaii Mahele See Handouts
Equity Pros: Risk Sharing/ Alignment of interests Takes cash out of deal Allows lower royalty rates Potential for upside Cons: University must function as a Shareholder/ accredited investor Potential liabilities Dilution Documents and Approvals