Methods of Intellectual Property Valuation

Abstract

This note addresses the methods used in valuing intellectual property, with a particular focus on patents. The note defines intellectual property and explains its growing importance. It also describes income methods, market approaches, discounted-cash-flow methods, and option-valuation methods.

Excerpt

UVA-F-1401

Methods of Intellectual Property Valuation

This note addresses the methods used in valuing intellectual property, with particular emphasis on valuing patents. Additionally, the note defines intellectual property and explains its growing importance in the world market. Detailed descriptions of income approaches, market approaches, and a review of cost approaches can be found in the text.

Defining Intellectual Property

Intellectual property (IP) shares many of the characteristics associated with real and personal property. For example, intellectual property is an asset and, as such, it can be bought, sold, licensed, exchanged, or gratuitously given away like any other form of property. Further, the intellectual property's owner has the right to prevent the unauthorized use or sale of the property. The most noticeable difference between intellectual property and other forms of property, however, is that intellectual property is intangible. That is, it cannot be defined or identified by its own physical parameters. Consequently, IP must be expressed in some discernible way to be protectable.

To be patentable, an invention must be novel, unique, useful, and nonobvious. A prerequisite to patentability is that the invention must be capable of some practical application. This emphasizes the importance the patent system puts on usefulness. One might say that a patent is a contract between society as a whole and an individual inventor. Under the terms of this social contract, the inventor is given the exclusive right to prevent others from making, using, and selling a patented invention for a fixed period of time in return for the inventor's disclosing the details of the invention to the public. Thus, patent systems encourage the disclosure of information to the public by rewarding an inventor for his or her endeavors.

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Keywords: option valuation, patents, valuation, intellectual property