Intellectual Property Valuation Basics
Some Basics Before Moving On…
The World Intellectual Property Organization (WIPO) has laid out some basics when it comes to putting a value on IP. So I am just going to quote a few of those from their web site here for the purpose of education.
First off, an IP must have exclusivity. WIPO says:
“The value of an IP asset essentially comes from the right the owner of that asset has to exclude competitors from using it. For an IP asset to have a quantifiable value it should:
- generate a measurable amount of economic benefits to its owner/user; and
- enhance the value of other assets with which it is associated.”
Okay, that is pretty clear. So WIPO goes on to say about value in general:
“The value of an IP asset represents the potential future economic benefits to the IP owner or authorized user. Value can be derived through:
- direct exploitation of the IP by integrating it within the product;
- sale or licensing of the IP to a third party; and
- other means, such as raising barriers to entry or reducing the threat of substitutes.”
Okay, for us fiction writers, that is also pretty clear. Hang on, it gets a little more complex. WIPO says:
“In order to be able sell, license or enter into any commercial arrangements based on IP, you need to be able to put a value on an IP asset. IP valuation is also beneficial in the enforcement of IP rights, for internal management of IP assets, and for various financial processes.”
Well, by general understanding of market conditions, we do this every time we publish a story. We set the price, or the cost of production of the paper copy helps set the price. But that is just a tiny part of that paragraph.
What about that simple little phrase “for internal management of IP assets…” Say, just for kicks and giggles, you have 20 stories and novels done. You have a publishing business of one type or another. What is the total value of those 20 stories and novels? I did a post looking at just the cost of production value. But in reality, what actually is the value?
And I will bet no one reading this has done that calculation for their own business past maybe the cost method, which is not a good method for fiction.
So moving on…
To even do a basic cost calculation of an IP, the WIPO says you need the following:
“To be able to value an IP asset, the asset should meet the following conditions:
- It must be separately identifiable (subject to specific identification and with a recognizable description)
- There should be tangible evidence of the existence of the asset (e.g. a contract, a license, a registration document, record in financial statements, etc.)
- It should have been created at an identifiable point in time.
- It should be capable of being legally enforced and transferred.
- Its income stream should be separately identifiable and isolated from those of other business assets.
- It should be able to be sold independently of other business assets.
- It should be subject to destruction or termination at an identifiable point in time.”
Well, those are all easy for us fiction writers. For just about all parts of what we do. They then go into reasons for needing this record, such as financing, licensing, and so on. Worth looking at as your business gets larger.
Finally, on this summary post, there are three major ways (a bunch of minor other ways that I will not get into ever) to value IP. I already started with the cost method, because, honestly, that is the easiest for everyone to understand. And at least allow a baseline.
The other two methods are called “Income” and “Market.” The market method is by far the simplest but seldom applies to fiction. It has in some cases and I’ll talk about that later. It really has lately in music with musicians selling their entire catalogs in different ways.
But for fiction, the most interesting way is the “Income” method. This method in different ways takes in the 70 years after author’s death valuation. This method is under battle a lot these days in courts. But you think your value of your business under the Cost method got big quickly, the income method will explode it.
So next post I will dig into the IP Valuation using the “Income” method. Might take me a couple of posts because this is where the other variations of valuation come in the most.
And let me stress again, not one bit of this has anything to do with your opinion of your own work. Or your investment in your own work. You created an IP. It has value. Figuring out that value is what these posts are all about.
(And one note cleaning up something in the last post. No one mentioned that I only used $50 per hour as my writing rate. Little local lawyers charge more per hour than that. I used to use $50 per hour when I was starting out. Now, if I used that method, my base rate is $250 per hour.
10 Comments
Harvey Stanbrouigh
Dean, I actually did an IP valuation about a year ago using the potential income method. With over 200 short stories in over 30 collections and over 70 novels, both stand alone and in several series in four different genres, the total was in the millions.
But that led me to worry about my heirs maybe having to pay taxes on that valuation (their inheritence). I suspect that’s a fine line to walk when considering a valuation. I’ll look forward to your future posts on this topic and in particular to that seeming conundrum.
dwsmith
Yes, it would be in the millions at least with that much product. At least.
Estate stuff is another matter completely in most cases. If that valuation held, you would not want your kids to be put into bankruptcy just trying to cover those taxes, that’s for sure. So that is why we see some writer’s work just vanish when they die. The heirs value the work at worthless and toss it away. Not kidding. Often their only choice because the writer didn’t understand copyright and value.
But there are many, many ways around this issue in estates. But that is for another series of blogs on that topic. First writers need to understand value of copyright and even the aspects of copyright itself. That’s why we are doing the Bite-Sized Copyright class with new stuff every Monday in 2023. It will be posted soon.
So Harvey, well done doing the valuation and thinking about your heirs. I will get to that part of all this this spring in another series of blog posts.
T Thorn Coyle
Hi Dean, I’ve been sharing this series with other writers, and mentioned the copyright class, too.
Looking forward to learning more.
dwsmith
Thanks, Thorn.
Anthony
No need to worry about that with a c corporation. And you get the benefit of being able to write off your depreciating assets to pay less taxes on your actual revenue.
dwsmith
Yes, you can depreciate IP if the company is set up right and is a C Corp. And C Corps don’t die with you.
Passing on your stock can be a little tricky if not done right, but if you have another stock holder or holders, such as your partner or children, it tends to be easy.
Connor Whiteley
Hi Dean,
Fascinating series of posts. I’m probably wrong. I know there are lots of other more-correct reasons and uses for this but after calculating the value of IP, would you include this in the information you would present to licensees? Like at the Licensing Expo.
I mean in the folder or Brand Guide you mentioned in the business masterclass containing information like font, covers, image license details and more.
Would this be useful at all to licensees in understanding why doing a rights deal with your IP makes sense to them from a business viewpoint? Or am I completely wrong?
Thanks in advance.
dwsmith
Connor, you are correct in the right circumstances and the right deal. Most IP holders dealing at the level of things at the Licensing Expo would know this information and would have it if asked. So you would present it if the circumstances were right, but have it if asked.
Sales on a possible licensed product are more important usually, even if the sales are only a few in a limited market on a prototype you have put together. With IP value and test sales, extrapolation to larger markets is possible.
Jeremy
This is cool stuff. I’ll be following these posts closely.
Frank Theodat
I’m really looking forward to the rest of these short posts. So much good info in them! I’ve sent these to other beginning writers in my circle. Information on IP and copyright are too important to ignore .
Thanks for writing this, Dean.