Little argument over intellectual property (IP) would occur if it did not have a value for the owner. The principle of valuing IP is to determine the future income associated with its ownership (Smith&Parr: Valuation of Intellectual Property and Intangible Assets, 3rd Edition, Wiley 2000). Note that the value of IP is independent of its cost. The creation of a musical composition, invention, valuable software may have cost little, and can generate a very high income. Profit margins from IP are typically much higher than profit margins from manufacturing of tangible goods.
Determination of future income requires estimating the income due to the IP in each of all future years over its life; i.e., the amount sold and the net income per unit after routine sales costs are deducted. If the IP is used internally, then the savings due to owning it can be similarly estimated. The risk that intellectual property becomes obsolete is high, and reduces the current value. Without risk, future income is discounted by using a stable discount rate, in the U.S. by using the Federal Treasury Note rate for the period. Risks include unexpected competition, unauthorized copying, patent breaches or invalidation, and loss of trade secrets. With such risks, discount rates increase, based on the expected Beta coefficient. With high discount rates, sales that occur far in the future have little effect, simplifying the determination of the net current value of the included IP.
When the items being valued contain multiple IP components, then the proportion and life of each component must be determined. That case exists in the small, as for software that receives updates throughout the future, and in the large, for companies that vend many products. Shareholders of public companies in effect estimate the aggregate IP of a company, providing a market capitalization through the price they are willing to pay for shares, which is in effect the sum of the book value and the IP owned by the company.
U.S. generally accepted accounting principles (GAAP) do not allow the listing on corporate books of IP, making it hard for investors to be rational about share prices. IP is generated mainly through research, development, and advertising (IP generating expenses or IGE), making it hard to assess the effectiveness of IGE. Companies participating in the knowledge economy typically have a market capitalization which is a large factor greater than their book value, the sum of their tangible assets and cash. Only when a company has been purchased will the purchased IP briefly appear on the books as goodwill.
Related Readings:
What is Intellectual Property
In law, particularly in common law jurisdictions, intellectual
property or IP refers to a legal entitlement which sometimes attaches
to the expressed form of an idea, or to some other intangible subject
matter. In general terms this legal entitlement sometimes enables its
holder to exercise exclusive control over the use of the IP. The term
intellectual property reflects the idea that the subject matter of IP
is the product of the mind or the intellect, and that once established,
such entitlements are generally treated as equivalent to tangible
property, and may be enforced as such by the courts.
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Valuation of intellectual property
Little argument over intellectual property (IP) would occur if it did not have a value for the owner. The principle of valuing IP is to determine the future income associated with its ownership. Determination of future income requires estimating the income due to the IP in each of all future years over its life; i.e., the amount sold and the net income per unit after routine sales costs are deducted. If the IP is used internally, then the savings due to owning it can be similarly estimated
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IP Organizations
Intellectual property organizations are international intergovernmental organizations that involve cooperation in the area of copyrights, trademarks and patents.
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Turn your dreams into reality: How to market your intellectual property to the global market
Whether you have tried to market your invention, art, craft, book or other talent in the past and failed or whether you have never tried beyond nurturing your ideas in your mind, please remember this--if you deeply believe in your talent, and if you have a vision of greatness for your ideas, one day you will be able to turn your dreams into reality.
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Describing Intellectual Property in Your Business Plan
Most companies that are worthy of raising venture capital have proprietary Intellectual Property (IP). In fact, the quality of the IP and the management team are often the two most important aspects of a venture capitalist’s investment decision. The challenge that many ventures face, however, is that most investors will not sign non-disclosure agreements (NDAs), and NDAs are critical to maintaining the proprietary nature of the IP.
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Innovators: How To Turn Your Dreams Into Reality
Whether you have tried to sell your ideas in the past and failed or whether you have never tried beyond nurturing your ideas in your mind, please remember this--if you deeply believe in your ideas and if you have a vision of greatness for your ideas, one day, you will be able to turn your dreams into reality.
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