The Changing Role of IP – or -- How IP Transactions are Financed Varda N. Main Director, Technology Licensing Rochester Institute of Technology LES 2002 Annual Meeting

V.N. Main – LES 2002 Annual Meeting Maximizing Shareholder Value from Intellectual Assets Changing role from IP as legal protection against possible infringement >>>>> IP as a financial asset and a source of competitive advantage

V.N. Main – LES 2002 Annual Meeting Monetization of IP Growing awareness that IP can be monetized in diverse ways: – Licensing – Sales – As collateral or security for debt financing – As basis for seeking equity financing – Tax credits and other government programs

V.N. Main – LES 2002 Annual Meeting Modeling Transaction Behavior “Every IP transaction is unique” ….. Or is it? Growing number of IP transactions >>> body of knowledge increases >>> complexity and accuracy of modeling increases Similarities to other forms of financial transactions becomes more evident

V.N. Main – LES 2002 Annual Meeting Securitization Pooling of (different) financial assets and then issuing new securities backed by those assets – Where those assets are claims of predictable future cash flows or future receivables

V.N. Main – LES 2002 Annual Meeting Using IP Assets as Collateral One needs to show the IP assets are: – Liquid – Robust – Marketable on their own in the event of bankruptcy or foreclosure – Valued separately from the business entity Valuation performed by objective third party IP management process becomes important

V.N. Main – LES 2002 Annual Meeting IP Assets - Due Diligence Clear definition of what IP is available Status and strength of IP protection Clean and clear ownership position by debtor Projected lifetime of IP Valuation of IP Encumbrances on IP including assignments Employee employment contracts

V.N. Main – LES 2002 Annual Meeting IP as Security - Risks Validity of patents not guaranteed Trade secrets can be independently discovered IP rights are easier to infringe than tangible assets Lender needs to give borrower ability to leverage IP

V.N. Main – LES 2002 Annual Meeting IP Asset Deals Disney – 400M$ against future royalties on film copyright Calvin Klein – 58M$ against future perfume revenues Arby’s – 290M$ against future franchise royalties and fees David Bowie – 55M$ against future royalties on best-known songs (Bowie Bonds)

V.N. Main – LES 2002 Annual Meeting Security Agreements for IP Assets Representations and warranties from IP owner: – All IP applications and registrations in good standing, valid and will be maintained – Trademarks are in continuous use – Debtor is owner of all IP and there are no outstanding claims of ownership on any of the IP – New IP will be protected in all appropriate jurisdictions as reasonable – IP assets will not be assigned or licensed without prior consent of the secured creditor – NDAs will be in place with all employees and others with access to the IP assets – IP assets will be placed in escrow

V.N. Main – LES 2002 Annual Meeting Security Agreement Due Diligence IP asset due diligence Review relevant statutes to determine proper means to perfect the security interest – Recorded by IP asset; not by agreement – Differs with registered and non-registered IP and type of IP Review rights in event of IP owner’s bankruptcy

V.N. Main – LES 2002 Annual Meeting Alternative Financing for IP Transactions - Trends Maximizing shareholder value from IP IP securitization becoming more important with the growing number of high tech firms with few other assets The pool of buyers and sellers for IP asset-backed securities is growing – With recognition of structure of IP deals – With increased ease of bringing potential buyers and sellers together (e.g. internet access) – With recognition of the realized value of IP assets

V.N. Main – LES 2002 Annual Meeting Specific Financing Vehicles Debt Financing – Dwight C. Olson – DSI Technology Escrow Services Sale – License-Back Transactions – Ray I. Throckmorton – TAEUS