Patents are an inherently risky investment and have lots of similarities to options trading. This is because they have value only when the market comes to them. At the time you purchase an option – and at the time you create a patent – you must place a bet on where the market will go. If you are right, the option – and the patent – will have incredible value and both options and patents have a tremendous economic leverage.
The cost of a patent is about $60,000. This is the total cost from drafting, prosecution with the examiner, to issuance and maintenance fees. Yet the value of a non-infringed patent that is in a competitive technology is often in the $200-500K range, and in many cases may be lower. When the patent is infringed, that patent is worth the commercial value of the infringement, which can be anywhere from $1-100M or even $1B range. The patent’s economic leverage is very much like an option contract.
The analogy holds true to the point where Black-Scholes option-pricing models can be used to assign values to patents.
Patents that do not have any known infringement often have a baseline value because somebody may expect them to have value over their lifespan. These can be thought of as “out of the money” call options, where the pricing is based on the *probability* that at some point there will be infringement. A typical non-infringed patent in a desirable technology may fetch between $100-200K, for example.
Patents that do have known infringement are equivalent to “in the money” call options, where the value is based on the licensing potential of the patent. For key technologies in very large markets, these patents can be worth in the millions or tens of millions of dollars.
A rule of thumb is that a patent will often have a peak value about 12 years after it issues. As the patent ages past 12 years, the value diminishes because its life is nearing the 20 year patent term. Conversely, early on in the lifecycle, the patent may not have as much value because the market has not yet arrived to see the vision of the inventor.
At the invention stage, by definition, there is no infringement. As the invention develops into a patent, there are many things that can be done to improve (or hurt) the valuation. We will discuss these in future posts.