Entrepreneurial Finance and Private Equity

Middle Stage

Class #10 – Monday, November 18, 2002

Patent Valuation

Case:    Aberlyn Capital (9-294-083)

Reading:  Methods of Intellectual Property Valuation

 

 Optional Reading:  A Note on Venture Leasing (9-294-069)  This note is useful for those unfamiliar with the industry practices in venture leasing.

 

Network File:  none

 

  1. How does venture leasing differ from traditional venture capital investing?  In what ways is it similar? 

 

  1. Aberlyn proposes to lend RhoMed $1 million.  RhoMed will make three even payments of principal, at the end of years 1, 2, and 3, as well as 15% interest on the amount outstanding before the repayment.  For example, at the end of the first year, RhoMed will pay $333,333 of principal, plus $150,000 of interest ($1,000,000* 15%).  In addition, Aberlyn receives about 70,000 warrants.  Each warrant allows it to purchase one RhoMed share for $1.45 at any point over the next five years.

 

  1. How did Aberlyn calculate how many warrants it should receive?  Does the warrant exercise price of $1.45 reflect RhoMed’s value.

 

  1. What is the real rate of return to Aberlyn?  To calculate this, you will need to compute the value of the options using the information above and in the case.  Foot note 9 in the case provides two suggestions of value.

 

  1. Does the valuation of the patent to be transferred to Aberlyn as part of the FLIP, reproduced in Exhibit 8, appear to be reasonable?