Patents are similar to out-of-the-money stock options.
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. 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-Sholes 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. This is “prospective value” or “prophetic value” in that we *hope* the invention has value at some point in the future.
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, but a non-infringed patent without much competition is essentially worthless.
Patents that do have demonstrated 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.
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.