A question of extracting value for patents

Not that long ago, 3 questions were posed to the team at gemaker about a technology that was yet to be granted a patent. These 3 questions are common when commercialising and we have heard them being asked within the industry before. So in the interest of sharing knowledge, we thought we’d share our responses with you:

  1. Can we ‘sell’ the patent, which is still under examination?

From our experience – the patent can be marketed at any stage – for example a provisionalInternational (PCT) and national phase. However, it is easier when the patent has been granted as there is more value realised in a protected space (and of course, that there is evidence that it works and has commercial value). When marketing it, we are careful about wording, for example, using the term ‘patent pending’. Depending on the stage the patent is at, we may ask for a confidentiality agreement, especially if still in provisional stage and yet to be published. The signing of a confidentiality agreement will allow a detailed discussion to take place and helps set the tone for a serious discussion on value. Yet it is not always necessary, as you can describe value with out giving away how it works.

  1. How do you really evaluate and put a price on a technology for a licensing deal?

Evaluation is a tricky question and is something that changes with each technology. There are some tools available to assist with modelling this. However, at gemaker we do an assessment of the market, and estimate the value of the technology based on the dollar benefit it would bring the client. Honing in on the technology application and industry, we look to see if there are any similar deals that have been made in the past. We do this by talking with colleagues or investigating online, essentially by performing the market research.

  1. Why can’t we just put royalties at 25%? And do we have to justify the percentage? 

When looking at charging royalties, such as 25%, its 25% of what? The revenue? The profit? Product sales? And over what time?

Determining how to charge depends on the industry. Some industries are comfortable within a certain range of royalties, others may firstly flat out refuse a percentage preferring a flat licence fee per year instead. The royalty rate may even be scaled down to encourage more productivity. Sometimes from a marketing perspective it’s better to hear a lower number, for example take 5% of the revenue, rather than 25% of profit (especially if you have no control over the expenses). You can get a sense by asking the potential customer and testing the figure out. And yes, every figure should be justified with logic as to the value and easily explained. It is important to demonstrate how it is of value to the potential customers’ business.

Our basic principle is, use common sense and keep good records.

We believe you can sell almost anything, as long as you are providing a solution for the client. That is they see value in context of their own business needs. So to sell a technology, we take time to understand the client’s problem, what value they place on it and how best to price it for them. A quick and easy example is of one company who wanted the technology, but didn’t want to pay the lump sum at the end of each year due to cash flow. An easy fix comparable to needs of both sides was to change the terms for payment to monthly instead of yearly.

To help with forming deals later down the track, we’ve kept records of our previous sales discussions and the terms set. These records have become an invaluable reference at a later date and enabled the ability to evaluate what worked, and which ones didn’t over different scenarios.

For more tips on deals check out: Making the deal: tips and tricks for successful IP licensing