Intellectual Asset Funding

 

Jane Lambert

Intellectual assets are the creations of the mind that give a business a competitive advantage over all others.  Examples include inventions, computer programs and goodwill.  They are not to be confused with intellectual property such as patents, copyrights and trade marks which protect them.

For many businesses, intellectual assets are their most valuable property.  However, their value has not always been appreciated.  Recently, lenders such as the NatWest Group have begun to accept intellectual assets as security for advances.  For instance, the NatWest Group teamed up with Inngot Limited to launch an IP-based lending proposition for high-growth businesses (see NatWest launches Intellectual Property-based lending to fuel high growth businesses 12 Jan 2024, NatWest website).

Following the former Chancellor's Mansion House speech, the British Business Bank announced a £6.5bn uplift to the Growth Guarantee Scheme to unlock further lending to smaller businesses over the next four years and up to £500m of ENABLE Guarantee capacity ringfenced over the next 12 months to support Intellectual Property-rich smaller businesses (see British Business Bank welcomes Chancellor of the Exchequer’s announcement of package of new measures to support smaller businesses 12 July 2026).

In that press release, the British Business Bank observes that many innovative businesses have significant value in intellectual property but lack the physical collateral that lenders traditionally rely on, which makes it difficult and prohibitively expensive to access debt finance.  Recognising this, the British Business Bank is making up to £500m of existing funding capacity available over an initial 12-month period to support lending to IP-rich smaller businesses. That is expected to help increase the availability of finance for IP-rich businesses, enable more competitive pricing and develop stronger lender capability to assess IP-driven business models.

The value of intellectual property rests ultimately in its ability to prevent unfair competition and resist applications for revocation and invalidation.  These matters are decided ultimately in the courtroom.  The persons best placed to advise on the likely outcome of infringement and invalidity proceedings are the advocates who would have to argue those points before judges and hearing officers.

Anyone wishing to discuss this article may call me on +44 (0)20 7404 5252 during office hours or send me a message through my contact form at any time.

How to Value a Patent

Crown Copyright  Open Government Licence 3.0

Jane Lambert

On Thursday 9 May 2024 I attended the Finance and Innovation Conference which took place at the Menai Science Park on Anglesey.  I wrote about my visit in M-SParc's Finance and Innovation Conference on 10 May 2024 in NIPC Wales.  Two of the most interesting conversations were Gwenllian Owen's discussion with a group of business angels and Edward Thomas's discussion with Steve Livingston and representatives of several local financial institutions.  All of those angels and institutions offered funding of various kinds to early-stage enterprises whose assets were likely to consist of little more than a patent or patent application or sometimes just an idea for an invention or business,  A question that I was bursting to ask them was how do you value the assets of such a business?

Because of the very full programme, there was not enough time for me to ask that question to either group of speakers so I decided to research it for myself.  This is what I have come up with.   The short answer is that a patent (or any other intellectual property right for that matter) is what a willing and informed assignee would pay a willing and informed assignor bargaining at arms' length.  I reached that conclusion after reading Valuing Your Intellectual Property which was published by the UK Intellectual Property Office on 12 Dec 2014 and last updated on 4 Jan 2022, How do you measure patent value? published by the European Patent Office and Valuing Intellectual Property Assets published by the World Intellectual Property Organization, the United Nations specialist agency for intellectual property.   The IPO's guidance incorporated the above animation.

Each of those publications refers to three methods of valuations:

• the cost method
• the market value method, and
• the income or economic benefit method.

The "cost method" is the owner's expenditure on developing the intellectual asset and is likely to include such costs as labour, cost or hire of premises, plant and equipment, raw materials, consultancy fees, prototyping and testing and patent prosecution.  The attraction of this method is that the purchaser does not have to incur those costs but the drawback is that the assignor may well have gone about his or her research and development work in the most efficient way.  Also, the IP right may not protect the asset as well as it might.   Expect a lot of horse-trading between the owner and his or her buyer, investor or lender. 

The "market value" method is to compare the proposed transaction with similar transactions relating to similar intellectual assets.   That is likely to be more accurate than the cost method where the relevant information is available because it is about transactions that have actually taken place.  One problem is that the parties may not wish to publish information about their deals.  Another is that the times may have been different.  A transaction that makes sense when interest rates or low or market demand is strong may be unviable now.  Yet another problem is that there may be significant differences between the invention in one transaction and the invention in another.   Also, newly formed businesses or businesses operating in a new technology or market may not be able to point to comparable data,

The "income" or "economic benefit" is the deduction of past and anticipated costs of developing the asset from the past and anticipated revenues that it may have and may continue to generate.  The problem with this method is that it requires a lot of crystal ball gazing and is likely to be subject to a lot of wishful thinking. However, if there are some licensing deals producing verifiable royalties or an income-generating invention it may be the most accurate method yet.   According to the WIPO, the income method is the most commonly used method of valuation.

There are businesses like Ocean Tomo that hold IP auctions from time to time.  I have no personal experience of them so I can neither recommend nor not recommend them. Readers contemplating such services should make their own enquiries, take their own advice and form their own views as to whether an auction would benefit them.

There are also businesses like Inngot which offer valuation services.  Inngot was co-founded by a distinguished academic lawyer who has recently retired as Principal of Bangor University.  I have shared a platform with one of its former employees on two occasions very successfully and have high regard for its publications.  However, I have no experience of its valuation services.

A first step for any business which wishes to value its IP would be an IP audit.  Readers may wish to consult How to Use an IP Audit which I wrote in NIPC News on 13 Jan 2022.  They may also wish to use the IPO's handy IPR Valuation Checklist.   While I do not carry out IP audits myself I can certainly address legal issues that may arise in the course of such exercises such as construing patent claims.   Anyone wishing to discuss this article may call me during office hours on 020 7404 5252 or send me a message through my contact form.

Writing IP into your Business Plan

Author Grenavitar Licence Public Domain Source Wikimedia Commons

Paternoster Square, City of London

 

Jane Lambert

A business plan plots out the course that a business is to take from its present position to a point in the future.  During that time it is expected to develop new products and/or services that will attract customers.  The design of goods, the technology that the goods or services incorporate or by which they are made or marketed and/or the reputation that the business develops are business assets.  As they are creations of the mind rather than space or machinery they are often referred to as intellectual assets.  The legal protection of those assets is known as intellectual property.

The first step is to identify intellectual assets.  As they are not always obvious, startups and other small businesses should make use of the WIPO's IP Diagnostics and the British Intellectual Property Office's IP Healthcheck tools which I mentioned in Saving Money on IP at a Time of Rising Prices on 19 May 2023.  As a company expands and becomes more diverse its owners should carry out regular intellectual property audits.  In How to Use an IP Audit (13 Jan 2022 NIPC News) I described IP audits as "a tool for identifying 'potential IP assets', that is to say, protectable intellectual assets."  That article discussed the different types of intellectual audits and how they may be used in business planning.

In that article, I warned:

"Like other tools, an IP audit can be misused. The identification of a patentable invention does not mean that a patent must always be sought. Considerable resources may be required to protect the invention in the countries where it may be marketed as well as those in which suppliers of competing products are located. Unless the development, production, marketing and distribution of the invention are already featured in or can be incorporated into the company's business plan. there are likely to be better uses for such resources."

In the next paragraph, I wrote:

"An IP audit can be put to better use when devising and monitoring the implementation of an intellectual property strategy."

I defined an intellectual property strategy as "the systematic application of intellectual property laws to achieve business objectives" in "What is an Intellectual Property Strategy" in NIPC Law on 19 May 2017.  I gave an example of a simple intellectual property strategy in Putting IP at the Heart of Your Business Plan in NIPC News on 2 Jan 2015:

"(1) Identify the likely income streams over the period of your business plan: these may be sales, payments for services, grants, subsidies - any kind of revenue;
(2) Consider the threats to those income streams over that period - most of those threats will be commercial such as competition from other businesses and changing customer behaviour but a few could result from copying your products or riding on your reputation;
(3) Develop responses to those threats - as most of those threats will be commercial so will your responses such as reducing prices and developing new products but such threats as plagiarism and free riding may require a legal response;
(4) Tailor your response to suit the threat and your resources - there is often more than one form of legal protection such as keeping your new product under wraps and relying on the law of confidence to keep it secret rather than seeking patent protection so consider all the options before you actually spend money on searches and applications."

I amplified that last point in Saving Money on IP at a Time of Rising Prices.   Patent prosecution is expensive and comes with the important downside that every invention must be disclosed "in a manner which is clear enough and complete enough for the invention to be performed by a person skilled in the art," Not every invention needs to be patented.  Much innovation can be protected adequately by trade secrecy or design rights.   

I also emphasised the importance of enforcement in Putting IP at the Heart of Your Business Plan and  Saving Money on IP at a Time of Rising Prices.   Business planners have to beware that a well-funded competitor may attempt to revoke their patent or other intellectual property right or simply infringe it.  While the Small Claims Track of the Intellectual Property Enterprise Court will resolve most types of IP claims for £10,000  or less that can be tried in a single day and there are cost-effective alternatives to litigation such as patent examiners' opinions and the Uniform Domain Nane Dispute Resolution Policy that I mentioned in Saving Money on IP at a Time of Rising Prices, most IP litigation is expensive.  Few startups or other small businesses can afford the cost of litigation in the Patents Court or even the Intellectual Property Enterprise Court multitrack.  The only way many of them can defend themselves is by relying on before-the-event IP insurance. A small number of brokers such as Sybaris Special Risks and Safeguard IP are beginning to write policies for small and medium enterprises.   As I said in Saving Money on IP at a Time of Rising Prices, the IPO has provided some useful guidance on IP insurance and the Chartered Institute of Patent Attorneys and the Chartered Institute of Trade Mark Attorneys. publish a list of specialist IP insurance brokers.

It is now possible to identify the information that can be written into a business plan:

• the intellectual assets discovered by using the WIPO or IPO diagnostic tools or commissioning an IP audit;
• professional fees for carrying out such an audit;
• costs of prosecuting applications for such patents, registered designs, trade marks or other registrable rights as are found to be necessary for devising an IP strategy;
• premiums for intellectual property insurance;
• renewal fees for patents and other registrable rights; and 
• contingencies and other miscellaneous expenses.

Costs are not the only information to be inserted into a business plan,   Assets have value and for many businesses, the most valuable assets may be their brand, their designs, their technology or their creative works.  Estimates of the expected values of those assets should also be inserted into the plan.   It is those assets that are most likely to persuade investors to invest or lenders to lend to the venture.

Anyone wishing to discuss this article may call me on 020 7404 5252 during office hours or send me a message through my contact form.

Patent Ownership Co-Ownership and Corporate Ownership

This was the title of Roger Lowe's talk to Sheffield Inventors Group on Monday. Roger is proprietor of ip4all, an intellectual property consultancy in Huddersfield.

He began his talk by quoting Mark Getty:

"Intellectual property is the oil of the 21 century. Look at the richest men a hundred years ago; they all made their money extracting natural resources or moving them around. All today’s richest men have made their money out of intellectual property."

Roger then discussed patents as property rights, something that can be bought, sold or charged. He considered ownership and warned that:

"The mere suggestion of co-ownership of patents makes the blood of IP practitioners run cold."

Co-ownership must be adopted only as a last resort.

Too true. He then explained why. Having told us why co-ownership is a bad thing he considered some of the alternatives such as licensing and corporate ownership. The best time to consider these issues is before the application for a patent but not every patent agent tells you that.

There will be no Inventors' Group meeting for May because the first Monday falls on the Mayday Bank Holiday but there will be an exhibition at Central Library to celebrate World IP Day on 26 April 2011. If you want to join the club or set up an inventors' club in your own area call us on 0800 862 0055 or complete our contact form.