PALO ALTO, Calif. IP Valuation, a unique startup, is bringing a fresh approach to an emerging problem placing a financial value on silicon intellectual-property (IP) cores. The company is working with both IP providers and purchasers on a consulting basis, and may soon start selling a software application that places a value on IP.
IP Valuation is the creation of Lloyd Nirenberg, chief executive officer of IP Valuation (Palo Alto, Calif.), and a former director of business development at National Semiconductor Corp., and Blake Johnson, president of IP Valuation and a professor at Stanford University's Department of Engineering Economic Systems and Operations Research.
"IP deals done by sellers and buyers use a relatively arbitrary idea of what things are worth and that is based on my direct experience," said Nirenberg. "People take a very simplistic approach that either leaves a lot of money on the table, or costs you more than you should pay."
IP Valuation works with sellers and buyers to develop a more scientific valuation for IP, based on its intended use. The company works with any type of IP, so long as it's not "commodity" IP such as PCI interfaces. Nirenberg said the company is currently working for "the biggest houses in the chip business" and has helped place a value on DSP and microcontroller cores.
When the company gets involved in a purchase decision, the first step often involves understanding what the buyer intends to do with the resultant chip. "Using forecasts, and their basic assumptions about the success of the product, we can crank out a variety of deal structures," said Nirenberg. The deal may be structured in different ways, involving royalties or up-front fees, but IP Valuation can craft fees so the total value stays the same.
The company has developed an "analytical framework" for value "events" that may invoke certain rights and payments, including the right to acquire, market, use and engage in technology transfers of the IP block.
While IP Valuation doesn't recommend any specific type of contract, one of its innovations is an "Option to Market" clause. When this is activated, a chip company can tell its OEM customer that it has rights to a given piece of IP. If the OEM contract falls through, however, the chip company is not obligated to actually purchase the IP.
"The problem is that the chip-design company is stuck in the middle," said Nirenberg. "The OEM says, 'Go get this core or we won't engage with you on this design.' The chip vendor licenses the core, pays a big up-front fee, and takes the risk that the deal with the OEM won't close.
"With Option to Market, the chip vendor can buy an option on the license and tell the OEM he has access to the core, but if the OEM doesn't engage with the chip vendor the option can expire," Nirenberg said. "On the other hand, if the deal is closed, it's all been prenegotiated."
IP Valuation is now considering whether to market Medici, which is the software application it uses in-house to provide value estimates. Medici takes in such information as market forecasts for the product that will use the IP, gross margins and proposed deal parameters like up-front fees and royalties. By changing various inputs, the user can see how the valuation changes.
In addition to consulting on IP transactions, the company organizes clients' internal processes for planning IP research and development and consults on the value of IP-based companies for mergers and acquisitions.