Importance of IP For Start-ups and Entrepreneurs (Part XI): IP Valuation for Start-ups

Starting up can be exhilarating, rewarding, and exhausting.  With your focus being on product development, managing investments, building key partnerships, and attracting the right employees, your intellectual property and its role can sometimes be relegated to the backburner.   Intangible assets such as Copyrights, Trademarks, Trade Secrets and Patents are playing an increasingly central role in start-ups and their transactions.  The creation of intellectual property, it’s licensing and commercialization is the new reality.  As a part of any valuation by a prospective investor or acquirer of your start-up, an IP due diligence is the starting point.  Based on this reality, it is important you realize and prioritize intellectual property early and often.

With respect to the role IP will play in your start-up, its funding and in the long term, your exit strategy should be thought of even in the initial business planning days.  Valuation of intellectual property rights is an essential part of good management.  The most common reasons for a start up to conduct an IP valuation are:

  1. As part of a merger, acquisition, partnership, alliance or liquidation;
  2. When looking to obtain funding or venture capital;
  3. Before licensing and commercialization;
  4. During litigation or alternative dispute resolution;
  5. For accounting and taxation purposes;and
  6. To help with business decision making

There are several different methods that can be used in valuation of IP.  Normally, these methods can be divided into two approaches-quantitative and qualitative.   A quantitative approach relies on numerical and measurable data to calculate the value of a given IP.  There are four general methods used in this approach.  One, the Cost Based Method makes a direct correlation between the cost spent on the development of the IP and its value.  Second, the Market Based Method assesses value of IP based on similar market equivalents.  Third, the Income Based Method assigns value to the IP based on its income potential.  Fourth, the Option Based Method relies on the options and opportunities related to the investment.

On the other hand a qualitative approach makes use of one method alone, the qualitative method of assigning value to an IP.  It focuses on the characteristics, strength and use of the IP and not analytical data.  However, choosing which approach and method to use for your valuation can be confusing therefore it is best left to valuation professionals.  Qualified valuation professionals possess a combination of legal, financial, technical and marketing expertise necessary to provide a comprehensive valuation.

Regardless of your reason for conducting a valuation of your IP, remember to get a realistic assessment, so that you are in the best position to make an informed decision for your business.