In the knowledge economy, two-thirds of a company’s balance sheet assets are comprised of intangible assets. The true value of companies no longer resides in factories or real estate. It resides in the minds of talented employees and in the intellectual property these employees generate, properties like trademarks, trade secrets, designs, know-how, copyrights and patents.
Yet intellectual property is notoriously hard to value. Why? Because unlike most other assets, there is no transparent public market that matches many buyers and sellers. Also, intellectual property is often highly specialized and context-specific, making it hard to develop value models based on similar transactions.
A similarly difficult value determination involves setting a price on your start-up, since there are few cash flows. However, as entrepreneurship guru Tim Berry mentions in his post “5 Concerete Steps to Starting Valuation“, the value of your start-up depends on the “cards you bring to the table.” As Tim mentions, you can improve your hand by owning a defensible product with intellectual property. So, before you shop around for investors, build a portfolio of intellectual property rights and use them as bargaining chips to negotiate value. It can mean the difference between giving up a majority stake in your business vs. giving up only a minority stake.
To learn more about intellectual property valuation methods click here.