The Indian start-up ecosystem is one of the largest and fastest growing ecosystems, having a blessing of 107 Unicorns. Start-ups can be defined as young companies founded to develop unique and novel products and services that the founders want to bring to the market.
In recent times with the growth and importance of innovation, start-ups are focused more on restructuring and are very much dependent on their Intellectual Property (“hereinafter referred to as “IP”). It is the value of the IP assets which often highlights the real market value of a company.
IP protection is primarily the most important exercise which a start-up should undertake to protect its innovation and exploit it to get maximum returns and stability. The valuation of such IP assets is also an important exercise which should be taken by start-ups to get further funding from investors. IP protection and valuation in consonance provide such start-ups the opportunity to grow and establish a market presence.
This Article shall deal with the idea of IP valuation and IP protection, and how it is a tool in the hands of investors and entrepreneurs alike to make the most out of the start-ups.
START-UPS AND IP
In recent years there has been a tremendous growth of start-ups in India and much of it can be credited to the use of innovation by such companies to develop unique goods and services which allow them to monopolise a complete market. These innovations and intellectual creations in order to be protected require a legal mechanism which enforces certain rights and obligations and allows the creator to exploit them and get returns. IP forms an essential part of start-ups and their protection is of prime importance.
According to the laws of the land, IP can be protected in several forms namely Trademark, Patent, Copyright, Design, among others. Each type of IP offers different benefits and protections to start-ups.
THE NEED FOR IP PROTECTION
The most important tool in the hands of a start-up are its IPs which allow the start-up to carry out its business without anyone being able to replicate nor cut into their market share. There further exists other benefits which arise out of getting the IPs of the company registered.
- Licensing and Royalty – Licensing the IP of a start-up to a third party allows for expansion of business to newer markets and also paves way for getting royalties for the use of such intellectual creation. Royalties are an important source of income for start-ups which lack the financial capacity to expand to a wider market.
- Create a Market Monopoly – Start-ups, through their Unique Selling Proposition (hereinafter referred to as “USP”), namely designs and patents, can create a monopolistic market for their unique products and services and also impose entry barriers by enforcing their IP rights enshrined to them after recognition.
- Attract Further Investments – A start-up can be referred to as a company which even though does not have the inventory of the finances but has the innovation which it could exploit to get high returns. This innovation can be exploited only when such innovation is protected under IP law.
With IP being protected, a Start-up is well within a shell of legal rights and obligations which allows it to have a sustainable market presence and have a rapid growth. This protection is a major attraction for investors who would want to fund the company and get returns.
IP valuation is the process used to evaluate the arm’s length or fair market value of IP assets. IP valuation helps to determine not only the value of the IP, but the true value of the business as a whole. Because IP often represents the most valuable assets a business possesses, calculating an accurate valuation of the business depends on accurately valuing its IP.
The three main approaches to Valuing IP Assets as provided by the World Intellectual Property Organization (hereinafter referred to as “WIPO”) are –
- Income method
The income method is the most commonly used method for IP valuation. It values the IP asset on the basis of the amount of economic income that it is expected to generate, adjusted to its present-day value. This method is the easiest to use for IP assets with positive cash flows, for those whose cash flows can be estimated with some degree of reliability for future periods, and where a proxy for risk can be used to obtain discount rates.
- Market method
The market method is based on a comparison with the actual price paid for the transfer of rights to a similar IP asset under comparable circumstances. This method has the advantage of being simple and based on market information, so it is often used to establish approximate values for use in determining royalty rates, tax, and inputs for the income method.
- Cost method
The cost method establishes the value of an IP asset by calculating the cost of a similar, or exact IP asset. The cost method is particularly useful when the IP asset can be easily reproduced and when the economic benefits of the asset cannot be accurately quantified. This method does not account for wasted costs, nor does it consider any unique or novel characteristics of the asset.
Need for IP Valuation
IP Valuation provides to the investors and the world at large, the value of a company which relies on its IP assets for its business. With a proper value in mind, investors may be attracted to invest in the venture and thus facilitate the growth of the start-up. The higher the valuation of a company would be, the higher would be the financing.
IP valuation also provides the start-up to formulate appropriate royalty rates and get the justified value of its use. IP Valuation is also a major tool which can be used by bigger corporation to acquire or merge an emerging start-up at its original value.
THE ROLE OF GOVERNMENT IN PROMOTION OF IPR AMONG START-UPS
The Central Government has taken several initiatives to promote the use of IPR by start-ups like the Patent (Amendment) Rules, 2017 which provide for a fast-track mechanism for start-ups and even an 80% fee reduction for registration. Other such initiatives include the Start-Ups Intellectual Property Protection (hereinafter referred to as “SIPP”) which facilitates registration of IP Rights by start-ups by providing facilitators who would aid and advise them in all IPR matters.
IP is the most essential tool in the hands of a start-up which allows it to protect its USP and innovations and also allows it to enjoy the benefits and rights provided by IP laws in India. Start-ups should ensure, prior to expanding their business or seeking funds, that they have a robust protection for their IP Assets.
IP Valuation is another exercise which start-ups should undertake to showcase their market value and attract investors for funding as well decide justified royalty rates in cases of licensing. Each and every start-up which depends on IP for its USP should undergo a valuation to ensure that they get maximised returns on their inputs and creations.
– Team AMLEGALS assisted by Mr. Niloy Ghosh (Intern)
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