How to Monetize Intellectual Property
Often, intangible assets are developed as a part of a company's overall productivity and growth. While some intangible assets contribute to the main economic benefit of the company, additional means of revenue may be generated through supplementary monetization means.
For example, ancillary intangible assets often become by-products of the main business. Rather than being pushed to the sideline, these ancillary intangible assets may nevertheless be leveraged to generate revenue. In other instances, main intangible assets may be monetized to generate multiple streams of revenue rather than the traditional single stream revenue.
Accordingly, the task of managing and introducing intangible or intellectual property assets into revenue streams requires an overarching strategy, specifically tailored to the business practices of each sector.
Planning and Strategy
Understanding the tools and relative strengths of different forms of intellectual property protection is important when planning an overarching monetization strategy.
Intellectual property or intangible assets include:
- Trademarks (i.e., brand logos, words, slogans and jingles)
- Patents (i.e., technical inventions)
- Copyrighted materials (i.e. written materials, drawings, computer code)
- Designs (i.e., industrial design of products)
- Domain names (i.e., website addresses)
- Trade secrets (i.e., method of doing something only known to select individuals)
- Other (i.e., goodwill associated with a brand)
The length and scope of protection of each type of intellectual property or intangible asset is varied. This may be determined by common law and statutory legislation, contractual confidentiality or non-disclosure agreements with employees and third parties, and physical barriers that limit the physical access of confidential information.
Unlike tangible assets (i.e., houses and cars), intangible assets do not diminish through use and can usually be used by several parties simultaneously. As such, conducting due diligence and evaluating intellectual property asset strengths are, therefore, crucial when executing co-development, licensing, collateralization, securitization, sale-leaseback, spin-out and other forms of monetization strategies (see figure 1).
Figure 1. Means of monetizing intellectual property or intangible assets
In some instances, companies publish patent scorecards and associated rankings of companies by intellectual property strengths, providing further methods of gauging the value of intangible assets. This type of information may be useful, as it may provide an indication of current and future competitive advantages or opportunities.
Traditionally, companies have generally invested their own time and resources into the creation of intellectual property or intangible assets. However, additional advantageous strategies include the formation of co-development partnerships, as this type of strategy drives towards a common goal, while distributing risk and combining resources.
Furthermore, the scope of the co-development partnership, the success criteria, the sublicensing and subcontracting rights, any indemnity and liability issues, and the consequences of dropped targets should be outlined in detail under the co-development agreement. Incentives, such as increased royalty rates or milestone payments, may further enhance the effectiveness of the activities under the agreement.
It is important to specify the ownership of intellectual property assets generated during the partnership in order to avoid later disputes. Decisions regarding the development, protection, and/or licence of additional intangible assets often depend on the industry and surrounding business climate. Overall, co-development agreements may be an excellent tool to distribute risk, while combining resources to achieve a common goal among multiple parties.
Due to the increasingly global nature of businesses, the licensing of intellectual property assets in competing and non-competing industries is becoming an increasingly lucrative and effective method of establishing and retaining market advantage.
As such, increased convergence and crossover of industries fuel the emergence of licensing agreements. For instance, companies assert aggressive methods of identifying licensing opportunities for non-core intellectual property assets to spread the costs of upfront investments on research and development.
Furthermore, licensing agreements between competitors who infringe another party's intellectual property portfolio may provide for mutually beneficial outcomes. While the intellectual property owner retains control, the licensor may have the ability to use the intellectual property while paying a predetermined royalty.
Depending on each party's bargaining positions and strength of the intellectual property asset, tremendous revenue may be generated from licensing operations. For example, it is well known that IBM generates over $1 billion in annual licensing revenues from its intellectual property assets.
Thus, the scope of ownership of the licensed product, the exclusivity, the field of use, the territorial limitations, the transfer or sublicensing rights, and other limitations are essential aspects that must be outlined meticulously in each licensing agreement. Similar to co-development agreements, these considerations are particularly important to avoid costly and time consuming disputes in court.
Securitization, Collateralization and Sale-Leaseback
Intangible assets may be used to generate financing. Copyright, trademark and patent securitization agreements have garnered increased attention from investors due to the relatively stable risk/return characteristics associated with a particular intellectual property asset.
In each case, the volatility of the anticipated revenue streams is determined based on due diligence and an asset credit quality analysis. Therefrom, investments are usually based on the expected volatility of the anticipated return streams.
Moroever, like any other forms of property, intellectual property assets may be collateralized to raise capital. In other words, third-party lenders may provide loans while holding intellectual property assets as collateral. Intermediate guarantors may provide further assurance to the third-party lenders of certain rights in the event of a default.
Lastly, the sale-leaseback of intangible assets may be a useful financial arrangement. Intellectual property rights may be combined and resold as a pool. Under this arrangement, a share of the proceeds may be returned to each contributor over time, diversifying risk.
Typically, spin-out opportunities consist of moving a portion of the intellectual property assets from an existing company to a new company. In doing so, marginally used intellectual property assets may be exploited more effectively under the umbrella of a new operation, which presents fewer competing priorities. Forming a new company may also attract new investment and new talent.
Depending on the jurisdiction, the activities associated with the development and monetization of intellectual property may relate to important tax planning issues.
In Quebec, the patent box has been introduced as a tax incentive for innovators. The patent box allows for the deduction of income derived from patents after March 17, 2016 for qualifying innovative manufacturing corporations in Quebec.
Specifically, income from innovation will be taxed at 4 per cent rather than the original 11.8 per cent for businesses that have more than $15-million in paid-up capital. This type of tax incentive may spread to other provinces and perhaps the federal government.
Alternatively, the Scientific Research and Experimental Development Tax Incentive Program (SRED) provides tax credits to entities conducting scientific research or development in Canada. As such, companies may plan accordingly to manage the tax implications of the development and monetization of intellectual property assets.
An essential element prior to the negotiation and drafting a commercial agreement or transaction regarding intangible assets is the performance of due diligence. In this context, due diligence provides detailed insight into the current and future strengths, weaknesses and opportunities when it comes to the exploitation of intellectual property assets.
More importantly, it provides the business, its investors or purchasers the opportunity to assess and manage any risks and to formulate an overarching strategy.
Additionally, intellectual property issues may be cheaply and easily corrected earlier in the lifecycle of a venture, but may generally become much more expensive to fix later on. Therefore, rather than merely performing a cursory exercise of due diligence, a detailed analysis may add tremendous value and provide insight into facts and issues that are frequently overlooked.
Currently, there is no worldwide system that governs intellectual property rights. As such, the extent and scope of protection conferred by each country may vary. Before entering into an agreement pertaining to intellectual property assets, the country's policies should be checked carefully. The agreement, and any related transactions, must comply with the country's regulations and formalities.
Parties to a cross-border agreement have the option of including a clause that opts into international arbitration. One major advantage is that under the New York Convention (1958), foreign arbitration awards are enforceable in each of the 156 signatory countries.
As such, courts in each country generally may not challenge the arbitral decision unless there are instances of fraud or serious irregularities. Further, the location of the arbitration may also be subject to negotiation and agreement between the parties.
On the whole, leveraging intellectual property assets to generate alternative sources of revenue may strengthen a company's overall profits and diversify risk. With an eye on the overarching strategy and a solid understanding of the current environment, the monetization of intellectual property assets may help an entity's overall productivity and growth.