A new statutory buy-out case demonstrates “the extreme difficulty” in valuing an early-stage company with no other assets than untested technology. One of the key problems: how to protect majority shareholders from reaping a windfall if the patented portfolios prove to be highly valuable without requiring them to overpay should the market fail to adopt the technology.
Mike Pellegrino was the court-appointed expert. “Pellegrino has been recognized as one of the world’s leading experts in intellectual property valuation,” the court said, in Vernon v. Cuomo, 06CVS8416 (N.C. Super. Ct., March 15, 2010). His valuation report “set forth clearly and in layman’s terms the factors, limitations, assumptions, and methodologies used to determine fair value.” Pellegrino also used statistical models (simulation algorithms and Monte Carlo simulations) to calculate fair value based on discounted future income. His approach was “appropriate for this type of business and clearly in the mainstream of IP valuation methodologies,” the court concluded.
The court’s decision validates the analysis methods that Pellegrino discusses at length in BVR’s Guide to Intellectual Property Valuation, in particular, the challenges of understanding the factors specific to the IP and also its value proposition, including estimating market share and adoption, taxes, risk, patent regulation and protections, operating budgets and capital requirements. Look for a compete digest of the North Carolina decision in a forthcoming (May 2010) Business Valuation Update™.
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