Financial Valuation Techniques In IP Licensing

Ivan Chaperot
Senior Licensing Manager, Alcatel-Lucent, Paris, France

In negotiations, offering multiple options to the other party sometimes improves the efficiency and the probability of reaching an agreement. The more creative the options are in view of the issues to be resolved, the more likely the negotiation will be successful. This general principle also applies when negotiating IP license agreements. The various clauses of a license agreement represent a variety of options to negotiate. However, most of the focus in negotiations is on the consideration, e.g. the royalty clause. This clause principally defines the monetary consideration payable to the licensor, i.e. the royalty amount and its payout schedule. This article provides a description of commonly used royalty structures that are part of the toolbox of IP licensing practitioners. It further describes different valuation techniques that are well-known in the finance industry, such as the discounted cash flow analysis and the real-option analysis, and shows how to apply those valuation techniques in the context of IP licensing. For the sake of understanding, those valuation techniques are applied to specific hypothetical numerical examples: a plain vanilla running royalty stream, a floored royalty stream and a royalty buy-out option.


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