Putting a Price on Patents

CFOs can play a critical role in bringing financial discipline to their companies' intellectual-property portfolios.
Marielle SegarraDecember 1, 2011

When Marc Linden was CFO at Mirapoint, an e-mail security provider, the firm regarded a patent that it held on an e-mail storage system as a competitive advantage. But as time passed, the patent started to lose its luster as the entire industry moved to more-advanced systems. Mirapoint — and Linden — faced a dilemma: Should the firm funnel more capital into renewing the patent on its onetime golden goose? What was the patent worth, anyway?

Substitute the word truck for patent, and the answer would be simpler. CFOs often take the lead on key business decisions when a company wants to buy or sell tangible assets like vehicles and buildings, says Linden, who is now CFO of cloud software provider Intacct.

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But making decisions about intellectual property can be more complicated than deciding to sell a truck, because determining IP value tends to involve some guesswork and requires a finance executive to “put value on something you’re not necessarily sure will have value,” says Ryan Goepel, CFO of Zeitecs, a small, private oil-technology company, where he estimates patents make up some 90% of the company’s value. “It’s almost like drafting baseball players,” he adds. “Many times, you don’t know if they’re going to work out for 5 to 10 years.”

Challenging as it is, getting a handle on a company’s intellectual-property portfolio has become crucial, as patents and other IP continue to account for an increasing chunk of companies’ value. As far back as 2005, in fact, the market value of IP in the United States was $5.5 trillion, according to a study sponsored by the nonprofit USA for Innovation. And with the recent passage of patent reform under the America Invents Act, taking stock of a company’s patent portfolio has become even more pressing, says Michael Gollin, a partner at law firm Venable LLP. “It’s [already] difficult to maximize the value of IP, and it’s going to get more complicated and expensive with the new law, which essentially creates two side-by-side systems for at least the next 5 to 10 years,” Gollin says. (See “New Patent Law Highlights the Need for Speed,” Topline, October.)

A Structured Approach
Gollin says companies tend to undervalue their IP on balance sheets, with intangible assets rarely coming close to the fair value of patents and other IP assets. Before deciding whether to renew a patent or ditch an application, finance chiefs may want to think more carefully about the way they value IP.

At Mirapoint, Linden and his fellow executives asked several questions to determine the worth of the company’s e-mail storage patent. First, “Is this even something that we’re going to be using in our own product?” he says. The answer: not very much. Second, “Is it something that if someone claims patent infringement against us, has some value in defense?” Since most companies had moved on to more-advanced technology, the answer, again, was no. They let the patent expire.

Gollin suggests using similar criteria in a more structured format — an IP financial statement. He proposes separating IP assets into four categories: assets of high importance to the company and of high market value, which should be patented and protected; assets that are important to the company but not as valuable to other companies, which should be maintained; assets with limited value to the company but high value to other companies, which could be licensed out; and “lost” assets that no longer have value in the company or the market, which companies should abandon. Companies can then try to place an approximate dollar value on their patents, helping them to create an IP strategy, in part, by determining whether the company has more IP assets than liabilities and more IP income than expenses.

Finance vs. R&D
Even if the CFO has come to terms with abandoning a patent or a patent application, others may disagree, particularly those who work directly on research and development, Zeitecs’s Goepel says. At some of his previous employers, he notes, scientists on staff would tend to spend up to the limits of their budgets without really focusing on the work’s strategic value. “A lot of times they would invent answers looking for problems, versus addressing problems and getting answers, and that’s where you would see waste,” he says.

To avoid a tug-of-war with research staff, CFOs should communicate the financial stakes and then ask the R&D team to reevaluate their efforts, Linden says. “Part of the role that I’ve played is just saying, ‘You understand that this is going to cost x thousand dollars by the time we’re done.’” If a CFO can bring that perspective, “it’s a great way to elicit feedback, because they [might] say, ‘Well, that thing’s not worth that much,’” he says.

Figuring out where a product and a patent fit into the company’s strategy is perhaps the most valuable role the CFO can play with regard to intellectual property, Goepel says. “I’m not going to be able to say, ‘There’s no way this metal will perform at this temperature and generate this much power.’ You have to rely on the engineers for that,” he says. “Our role is to say, ‘Is this something we do? Is this something we want to be involved in? How does this fit in with our plans, and is it [worth] a major investment?’”

The answers can vary widely by product and by company, depending on the industry and the competitive set. For some companies, not maintaining any patents at all is a viable strategy. “I think that if you’re in an industry where you’re doing a lot of groundbreaking technology or where there are significant, competitive patent portfolios, your best defense is having your own patents,” Linden says. “Neither of those is something Intacct deals with.”

A lot can depend on how much of the company’s value is tied to a given patent, Goepel says. “If we didn’t have the patent, what we have is pretty easily made. If that patent didn’t exist, what would we be worth? In our case, I’d say significantly less.”

Marielle Segarra is staff writer at CFO.