e d p sameer avasarala, publishing editor v e s t a m adv ...jicil.info/issue3/art1.pdf ·...

EDITORIAL ON THE EMERGING DATA PRIVACY REGIME Sameer Avasarala, Publishing Editor

• VALUATION OF EARLY STAGE TECHNOLOGY – A MILESTONE ON THE

CONTINUOUS PATH Adv. Dilip Sharma

• VALIDITY OF NON-COMPETE CLAUSE IN CORPORATE TRANSACTIONS UNDER

COMPETITION LAW Ms. Sonalika Ahuja & Mr. Dewang Singh Chauhan

• ABUSE OF DOMINANT POSITION: A COMPETITION LAW PERSPECTIVE Ms. Sandra N. S.

Ankita Aseri | Editor-in-Chief

Pooja Kurian | Deputy Editor-in-Chief

Published by Agradoot Web Technologies LLP

e-ISSN: 2455-2771

Journal of Innovation, Competition & Information Law

Edition III | November 2018 3

Adv. Dilip Sharma1

ABSTRACT

Early stage technology refers to those technologies which are not yet completely developed.2 Early

stage technologies are closer to future commercialization. So, before any future exploitation of the

early stage technology, it is important to first valuate that technology for a number of reasons such

as Commercialization, insurance, securitization, internal management etc. Here, valuation of

early stage technology is referred as the first milestone on the continuous path as early stage

technology exhibits a potential chance of improvement and future developments which might

enhance the value of that particular intellectual property (hereinafter referred to as “IP”) with

every new development. So, valuation of early stage technology is referred as the very first and

most significant juncture on this continuous path.

The major issue with the valuation of early stage technology is that from the very core of its

conceptualization stage, it includes a lot of uncertainties pertaining to its success and commercial

viability. The level of uncertainty in early stage technologies is so high that even their operational

and probable return value for present and future investments is highly debatable. There is a

probability of both success and failure in case of commercialization of early stage technology.

Normally it is the success factor which is used as a flexibility to enhance the early stage

technology’s valuation from the seller’s perspective. Further, in case of early stage technology,

there is an absence of any comparable asset in the relevant market, making the valuation of early

stage technology really difficult. Also, every approach which is normally used for valuation of

early stage technology has its own strengths and weaknesses, so it is really difficult to find the

most appropriate or favorable approach for valuation of early stage technology.

1 NET, LLM (IPR), National Law University, Jodhpur, B.A.LL.B. (Hons), Institute of Law, Nirma University. 2Gordon V. Smith & Russell L. Parr, Valuation of Intellectual Property and Intangible Assets, (3rd ed., John Wiley &

Sons).



In this research paper, an attempt has been made by the researcher to conceptualize the concept

of early stage technology and to subsequently, find the most appropriate/favorable approach for

the valuation of early stage technology. Whilst finding the most appropriate approach for

valuation of early stage technology, the researcher will also analyze the various approaches which

can be used for the valuation of early stage technology, along with the strengths and weaknesses

and pros and cons of using each of those approaches in valuation of early stage technology.

Keywords – Cost approach, early stage technology, historical cost trending, income approach,

market approach, Monte Carlo Stimulation, valuation.

INTRODUCTION

Early stage technology is referred as the technology which has not yet commercialized or still not

proven beyond laboratory experiments.3 Under the concept of early stage technology, it refers to

that stage where either the idea is still under the process of execution or is under laboratory testing,

etc. In short, it is nothing more than a technical idea which is yet to be fully expressed or tested.

Early stage of technology is also referred as the development stage where the technology is still

either on paper or is in the process of evolving and which has normally not yet passed the industry

standards. In case of early stage technology, there is no surety about the success or failure of

technology and the level of market desirability is also unpredictable.4 It is that stage of

development of technology where everything is done only on the basis of predictions and the hope

for success, but the actual success or failure is not predictable.

It is the most crucial stage of development of technology where the researcher spends his time and

money without the viability of technology being actually proven. Nowadays, technologies are sold

or commercialized even before the actual execution, so the valuation of technology is important at

early stage considering the need for funding, insurance, commercial exploitation, etc. For various

purposes, the early stage technology is further categorized into various categories which are as

listed below.

3 Frank J. Fabozzi, Entrepreneurial Finance and Accounting for High-Tech Companies, (MIT Press, 2018). 4 Stephen Mayhew, Encompassing Approaches for Valuation of Early Stage Life Sciences Technology, Available at -

http://ipimediaworld.com/wp-content/uploads/2012/05/Pages-from-IPI-Volume-2-Issue-1.pdf (Accessed on 28 Feb

2018).



CATEGORIES OF EARLY STAGE TECHNOLOGY

We can categorize the early stage technology into three prominent types: They are as follows –

Untested Ideas – These are merely the ideas which are mainly represented as a pencil sketch. In

case of untested ideas, it is not accompanied by any test data or formulations. In case of untested

ideas, it is barely known that the technology will perform as was expected or not. Further, in case

of untested ideas, it is not known that whether the market exists for the product or process which

would employ this particular technology.5 Here, almost everything is uncertain about the

technology in this category. It is normally valued for the purpose of fund raising or getting funds

for further research, execution and testing etc.

Benchtop Technology – It is the second category of early stage technology where it is no more

than merely an idea but is now evolved and has shown some promise during the laboratory testing.

In this stage, the technology is considered as prudent and is under the process of continued

exploration and refinement. Here, the continued research and development, further results into the

creation of samples, testing, experimentation and collection of data, etc.

Prototype Technology – Prototype technology normally refers to the scaled down version of

technology. It is the third category of early stage technology where the first-hand constructed

version of technology is made which embodies the technology. This is the step which is closer to

the commercialization of technology, but the full-scale manufacturing of the product is still

pending and its viability is yet to be proven. It is the stage where the testing of the technology is

focused on evaluating and determining the future viability and potential of the newly made

technology. Here, pilot study of the technology is done using pilot plants and testing machines to

test the working of new technology before the commercialization or commercial manufacturing of

the new technology product.

The above mentioned are the major categories in which the early stage technology is divided

according to its development. Here, the categorization is done to know the exact status and future

aspects of the technology.

5 Christopher M. Kalanje, Role of Intellectual Property in Innovation and New Product Development, Available at -

http://www.wipo.int/sme/en/documents/ip_innovation_development_fulltext.html (Accessed on 2 March 2018).



CHARACTERISTICS OF EARLY STAGE TECHNOLOGY

The major characteristics of the early stage technology are as follows –

1. Under Development – The first characteristic of early stage technology is that it is in its

initial stage that means it is still under the development process and has not yet been

completely developed.6 Here, the early stage technology can be at any of the three stages

as categorized above under the domain of early stage technology for further development

so that it can be used or commercially exploited in future.

2. Not yet offered for Commercial Sale – Another key characteristic of early stage

technology is that it is not yet offered for commercial sale. This means that the technology

is not yet commercially exploited and will launch in the market for the first time in coming

years.

3. Unpredictable Future – In case of early stage technology since the technology is still

under the process of development so currently its future is not predictable that whether it

will work or not, will be successful or not etc.7

4. Industry standards have not yet been passed –The industrial standards have not yet been

passed by the technology and it is still under development or testing process.

5. No Government Approval Yet – In case of early stage technology, since it is still under

testing and development, so the government approvals are pending. Since it is not yet

approved by government, so there is a lot of risk involved in early stage technology that

will it get government approvals or not. Here, there is a lot of uncertainty in case of

obtaining government approval especially in such countries or cases where the approval

procedure is strict, e.g. in case of pharmaceuticals.

6. No Surety about desirability of technology in market – In case of early stage technology,

since it is the first time that this technology is coming to the market, so there is uncertainty

about the public reaction and the desirability of the product in the market. There is a serious

6 Innovation and Commercialization, Available at - https://www.princeton.edu/~ota/disk1/1995/9539/953904. PDF

(Accessed on 3 March 2018). 7 Marc Wouters, Customer Value Propositions in the Context of Technology Commercialization, Available at -

https://ssrn.com/abstract=1654282 (Accessed on 28 Feb 2018).



risk of success or failure depending on the public demand and likeness of the product in

the market. Here, we can take example of DTH which got famous in just a couple of years

where as the cell phone which was invented in 1960 got public desirability just in recent

past two decades. So, public desirability cannot be predicted.

7. Viability of Technology is not yet Proved – In case of early stage technology, the viability

of the technology is yet to be proved that whether the product will be technologically viable

or not.

Above mentioned are the various characteristics of the early stage technology which makes it

unique, uncertain and challenging to predict the future of the early stage technology.

WAYS TO GENERATE MONEY THROUGH EARLY STAGE TECHNOLOGY

Normally, it is witnessed that the major aim behind generating any form of intellectual property is

to commercially exploit it and to generate good amount of money from it. Today from trademark

to patent, almost every form of IP is used to generate money. Every holder of the IP wants to

exploit it as soon as possible. It reminds me of a famous saying that “one rupee in your hand today

is better than no money tomorrow”. Here, the exploitation of technology right from its early stage

seems to be based on the same saying where the developer of the technology wants to exploit it as

soon as possible so he goes for valuation of IP for a number of reasons such as for commercial

exploitation, licensing, assignment etc.8 So, coming back to the aforementioned saying, here we

will see the various ways in which money can be generated through early stage technology which

are as follows –

1. Funding – The first and most common way of getting money using your early stage

technology is by getting funding for your research and the development of the technology

you are working on.

a. Securitization – In case of securitization, the money is generated through Collateral

loans by granting a security interest in IP. Securitization in case of early stage

technology is by providing security interest in IP to fund provider. Here, the investors

8 Richard Razgaitis, Pricing the Intellectual Property of Early-Stage Technologies: A Primer of Basic Valuation Tools

and Considerations, Available at - http://www.iphandbook.org/handbook/ch09/p03/ (Accessed on 3 March 2018).



normally provide funds to get a share out of the IP when in future it is used

commercially.

b. Debt for research and Development – The funding for the development of early stage

technology can also be done by providing a debt for a future research and development.

This is another way of generating money for future research and development of IP

where you can put other assets as security instead of providing an interest in IP.

2. Assignment – Another method of generating money through early stage technology is to

assign the technology right at its early stage. Here, the assignment of early stage technology

can be done by two ways which are discussed as follows –

a. Assignment of only the Early Stage Version of Technology – Under it, the

assignment is done for only the early stage version of the technology where the assignee

is not entitled to any update and the rights are transferred only for the present version

of technology.

b. Assignment with Future Updates – The assignment over the technology is done with

a contract or promise that the developer will make further improvements in the

technology and will provide all the updates to the assignee.

3. Licensing – Money can be granted by granting a license over early stage technology right

at the early stage of its development.9 In case of licensing, the royalty is paid in exchange

of license so as to use the technology. Here, license can be either exclusive or non-exclusive

as per the terms and conditions of the license agreement as agreed by both the parties. Here,

like in case of assignment the license can also be made in two ways –

a. License only for the early Version of Technology – The license is provided over only

the early version of the technology and royalty is given to the licensor for just the early

version of technology.

b. License with Future Updates – The license is provided to the person seeking the

license with the agreement to provide future updates of the present version of

9 Hurdles to Licensing Early Stage Technologies, Available at - http://www.hopkinsmedicine.org/webnotes/

newsletter_draft/licensing/0308.cfm (Accessed on 3 March 2018).



technology. E.g. – Google provides updates for the android to its users in those cases

where the license is granted with an agreement to provide future updates.

4. Cross Licensing – The money can also be generated from early stage technology by way

of cross licensing where the early version of technology can be made a part of the pool.

Here, the terms of cross licensing will depend on the terms agreed by all the parties to the

pool.

Above mentioned are the various ways by which money can be generated through the early stage

technology. Here, for the purpose of generating money and for setting a price or royalty rate,

initially there is a strong need for the valuation of the early stage version of technology to get the

present probable value of the technology.

ISSUES ASSOCIATED WITH VALUATION OF EARLY STAGE TECHNOLOGY

As discussed before, the valuation of early stage technology is important because of a number of

reasons such as for funding, future commercialization, insurance, licensing, internal management,

etc. Here, for the purpose of valuation we normally follow three approaches for the valuation of

any form of IP which are – Cost Approach, Market Approach and Income Approach.10 These

approaches are used to valuate any form of IP on the basis of various factors depending on the

approach varying from case to case. But there are few limitations to the use of these methods for

the valuation of early stage technology because of a number of issues associated with valuation of

early stage technology. Here, since it is the early stage so there are various factors which we cannot

control due to a number of issues associated with them.11 These issues related to valuation of early

stage technology are as follows –

Uncertainty about functionality – Since it is an early stage technology so there is an uncertainty

about the ultimate functionality of the technology because the technology is not yet completely

10 L. R. Vega González & J.M. Saniger Blesa, Valuation Methodology for Technology Developed at Academic R&D

Groups, 8(1) Journal of Applied Research and Technology (2010), Available at -

http://www.scielo.org.mx/pdf/jart/v8n1/v8n1a2.pdf (Accessed on 1 March 2017). 11 M. Amram, The Challenge of Valuing Patents and Early-Stage Technologies, 17(2) Journal of Applied Corporate

Finance (2005), 68-81.



developed so there is no surety that the early stage technology will function properly after the

completion of development or manufacturing of technology.12

No Established Market – In case of early stage technology, there is no established market for the

exploitation of technology. So, in the absence of any established active market, it is quite hard to

compare or to assume the viability of the early stage technology in the market.

No Replacement – In case of early stage technology, since it is the first time the technology is in

the market and is still in its early stage so there is no replacement available to the present

technology, so it is quite hard to find a replacement cost of the present early stage technology.

No Comparable Asset – Since the technology is new in the market, so there is no comparable

asset present in the market with which the technology can be compared. In absence of any

comparable asset, we cannot apply the market approach for the purpose of valuation of early stage

technology.

No Survey on Public Desirability – Since the technology is still in its early stage, there is no

survey or data available regarding the public desirability of the early stage technology. Here, in

absence of any survey or data, this makes it really difficult to predict the future of the technology

right at its early stage.

No Data Available for Calculation of Future Income – In case of early stage technology, there

is no data available for the calculation of the future income of the technology. This makes the

calculation of future of early stage technology solely on the basis of assumptions.

Based on Predictions – Due to absence of any data available for either comparison, calculation

of future income, absence of any survey etc. so it leads to the valuation of early stage technology

mainly on the basis of predictions and assumptions which are prone to be wrong.13

High Risk – Since majority of the factors are based on the predictions, assumptions and

expectations, there is a high risk or probability of error in the calculation of the correct price of the

early stage technology.

12 M. Dissel et. al., Evaluating Early Stage Technology Valuation Methods: What is Available and What Really

Matters, Available at - http://ieeexplore.ieee.org/document/1559140/ (Accessed on 2 March 2018). 13 M.C. Dissel et al., Value Road mapping: A Structured Approach for Early Stage Technology Investment Decisions,

Available at - http://ieeexplore.ieee.org/document/4077535/ (Accessed on 2 March 2018).



Above mentioned are the various issues or problems which are associated with the valuation of

early stage technology. Here, these issues make it really difficult to valuate or to calculate the value

of early stage technology correctly. Because of these issues, the valuation of early stage technology

should be done with utmost care and caution considering all the available factors and probable risk

involved in its valuation. Here, for the purpose of valuation of early stage technology, we can use

three major approaches which are discussed in the next chapter of this research project along with

their pros and cons.

VALUATION OF EARLY STAGE TECHNOLOGY

In present time, the valuation of early stage technology is important for a number of reasons such

as for funding, commercial exploitation including for sale, license, assignment etc. Valuation of

early stage technology is also important because it allows the developer to assess whether or not

to develop the technology further based on its valuation and expected pay-back, to license it or

not, etc. It gives a true reflection of the product’s value in the market. In case of early stage

technology, its valuation needs some special attention compared to valuating any other form of IP

because as discussed above, the early stage technology has not yet been offered for commercial

sale and since there is no similar asset or data available for comparison, there are a lot of

uncertainties attached to the valuation of early stage technology.

In this part, we will discuss the various available factors and then analyze the different approaches

available for valuation of early stage technology along with their strengths and weaknesses.

APPROACHES FOR VALUATION OF EARLY STAGE TECHNOLOGY

Cost Approach - As per the cost approach, it is used to find the cost of the IP by using the

reproduction or replacement cost (the creation cost of equivalent IP). Under the cost approach, it

also includes the concept of historical cost trending where it identifies all the cost incurred at the

time of making that particular IP which includes the cost incurred in research and development,

cost of raw materials and labor, etc. Under historical cost trending, it also includes the inflation

factor as an important factor to identify the cost in context of present-day rates or current cost.

Although the cost approach does not include the cost of failure while calculating cost through

historical cost trending, but the cost of failure for which data related to consumed resources,

infrastructure, etc. are available on record can be added. In this approach, only those data of failure



will be added for which the records are available. Under the cost approach, it also takes due care

of the obsolescence which can either be technical, economical or legal in nature. In short, under

the historical cost trending, we take a sum total of the whole cost incurred in the making of that

particular asset or IP to find the base value of that IP. Here, the base value provides the developer

with the base cost incurred in the making of IP below which he will not sell under any

circumstance.

In case of early stage technology, we can use cost approach for getting the base value or the base

fare below which the developer will not sell or commercialize his early stage technology at any

cost. Here, while using the cost approach, we will consider and include all the cost incurred in the

making of early stage technology which includes the cost of research and development, raw

materials, labor, infrastructure, etc. Here, we also include all the cost incurred on record and

multiply it with the inflation factor to get the present-day cost of creating the same early stage

technology. Using the cost approach, it will provide us with the minimum or base value of the

early stage technology.

Hence, cost approach is a very good approach in determining the minimum or base value in those

circumstances where no other data is available to evaluate the cost of that IP. This approach can

be used to correlate the cost incurred and the value of IP when the IP is in its pre-commercialization

stage and no other data is available. It helps the developer or creator of IP to at least cover the cost

of making or developing the technology by providing a minimum base cost.

Despite so many advantages, the cost approach is also sometimes criticized for a number of reasons

such as for having limited effect, dependent on inflation, for not including cost of failure, especially

those cost of failure which are not on record. These factors sometimes lower down the base value

than the actual cost incurred. However, on the other hand, it is considered as one of the best

approaches for evaluating the early stage technologies where no other data is available except the

record of all the cost incurred which ultimately helps the developer or researcher by providing a

minimum cost or base value of his technology or IP.

Market Approach

Market approach is one of the approaches which are used for valuation of intellectual property in

circumstances where the comparable transactions are available to compare and to find the better



value of IP by comparing. The market approach includes three major factors for comparison which

are – Active Market, Comparable Asset and disclosed data.14

But, since the technology is new and there is no such technology pre-existing in the market, so

there is no comparable asset or active market present to which the technology can be compared

resulting in lack of availability of data for comparison. So, because of all these reasons and absence

of all the factors, the market approach cannot be applied for the valuation of early stage technology.

Income Approach

Under the income approach, it projects the future revenue which is expected to be generated from

the IP over a certain period of time. Here, while valuating any particular IP using income approach,

we normally take into consideration the time factor, risk involved and value of money. For the

purpose of valuation under the income approach, there are few essential elements which are -

market penetration, sales forecast, risk involved and pre-commercialization cost. Under the income

approach, we normally follow the discounted cash flow method which is used for the projection

of future net cash flow which is expected from the commercial use of IP over a period of time

which is further discounted by considering the risk factor involved and the time value of money.

Under the Discounted cash flow method, for the valuation of early stage technology, it includes a

lot of high-risk factor attached to it as there is delayed time to the income and also there are

additional investment cost which is needed for further development during that time period.

However, the high discount rate counterbalances the high risk. In case of using the discounted cash

flow method, the combination of delayed income and high discount rate lower the value of the

technology which makes it not a good method which should be adopted by the seller of early stage

technology. Also, there are further commercial risks involved such as inflation, changing economic

condition and probability of entrance of competition which may arise in due course of time tenure

taken into consideration for valuation.

Under the Income approach, there is another method called as Monte Carlo Stimulation method

which is also used for valuing IPs along with discounted cash flow method. Under the Monte Carlo

method, for each discounted cash flow element, it provides a range of possible values and different

options for distribution of these values. Under the Monte Carlo Method, it provides the opportunity

14Akshat Pande, Valuation of Intellectual Property Assets, (Eastern Law House, 2010).



of projection of thousands of scenarios. It shows the net present value in the form of a frequency

chart which is easy to visualize and is made with respect to the probabilities of the net present

outcome.

Since there is a lot of risk involved in the commercialization of early stage technology and the fact

that its valuation is majorly based on future predictions, we can use the Monte Carlo stimulation

along with discounted cash flow for its valuation as it furnishes us with an opportunity to select a

range of values which are selected considering the different circumstances being the best, worst or

most likely outcome. In case of early stage technology, it requires a lot of time and money to

transform it from the existing early stage technology to a commercially viable technology. Under

the Monte Carlo method, there is an ease to select and valuate using the best, worst and most likely

or possible case where different assumptions are made regarding the market penetration, product

pricing, cost of manufacture, commercialization and development cost, time required for

commercialization and expected time period for which the product can be commercially exploited.

But the income approach is also often criticized for using it for valuation of early stage technology

because according to them the income approach is based on a lot of predictions and in case of early

stage technology, since there is no data available, so the predictions are without any basis. So, it is

not a preferred approach but here, in reply to this criticism, we can use the discounted cash flow

method along with the Monte Carlo stimulation method under the ambit of income approach where

we can select the best, worst and most likely possible range of values for the valuation of early

stage technology. Here, it allows us to predict all the likely or possible circumstances and then

valuate according to them making it a good approach for the valuation of early stage technology

despite the fact that there are a lot of factors including the risk and predictions which are involved

in the valuation of early stage technology.

The above three discussed approaches are majorly used for the purpose of valuation of intellectual

properties out of which market approach is not applicable in case of early stage technology because

of absence of any comparable asset in the market. However, here we can use the Cost approach by

way of historical cost trending to find the base value of the early stage technology and the market

approach to find the present value using the future expected value considering the various factors

involved such as time, cost and risk involved in the success or failure of early stage technology.



Here, any of these two approaches can be used based on the circumstances and available factors

and records available for the valuation of early stage technology.

CONCLUSION

The valuation of early stage technology is unique and involves a lot of issues because under early

stage technology it is not yet commercialized and no data is available for the valuation of early

stage technology.15 Here, in absence of any data or comparable asset available for comparison, the

market approach cannot be used for the valuation of early stage technology. Looking at different

circumstances, we can apply income approach in the form of discounted cash flow or along with

Monte Carlo Stimulation for the valuation of early stage technology. Here, under the Monte Carlo

Stimulation we can use data and models based on the best, worst and most likely situation or case

where different assumptions for the purpose of valuation are made regarding the market

penetration, product pricing, cost of manufacture, commercialization and development cost, risk

involved, time required for commercialization and expected time period for which the product can

be commercially exploited.

However, where it is not possible to reasonably forecast about the potential or viability of the

commercial exploitation of the early stage technology in those circumstances, we can use the cost

approach which can help in finding out the base value of the early stage technology. Under the

cost approach, we can use the historical cost trending to find the base value of the early stage

technology.

Hence, on the basis of above discussed circumstances, we can conclude that the use of cost or

income approach for the valuation of early stage technology is recommended, taking into

consideration the available factors or records which can be used for the valuation of early stage

technology on the case to case basis.

15 Gordon V. Smith & Russell L. Parr, Valuation of Intellectual Property and Intangible Assets, (3rd ed., John Wiley

& Sons).

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