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Today 60 billion e-mails are sent every day, and that figure is increasing by the day! Although half of these are unwanted spam, the rest are a cocktail of formal, informal, serious and humorous writings, all sent for different reasons and different motives. In a business context, those e-mails, and all the other electronic records that form part of business activity, are a permanent record of events.

The law has long recognised verbal contracts, but there has always been the hurdle of how to prove a verbal contract has been created when it may be one person’s word against the other. Now, in the electronic and digital age, e-disclosure opens up all forms of electronic medium to scrutiny by the courts, which means that, more than ever before, business managers need to manage the creation and management of their data and the access to that data.

A document is no longer just a written page. It is now anything in which information of any description is recorded. In fact it is anything upon which evidence is recorded in a manner intelligible to the senses or capable of being made intelligible by the use of equipment. So, electronic documents can be found on any form of electronic media, which includes everything from computers, servers, DVD’s memory sticks, mobile telephones, voicemail records, MP3/4 players, and digital cameras. It even includes metadata which is a description of the data itself.

In court proceedings in England, the duty of disclosure even applies to documents that no longer exist, privileged and confidential documents, and documents found or which come into existence during the court proceedings. E-disclosure is a global issue because documents include electronic data sent from and to anywhere in the world in any electronic medium.

Where there is a dispute, there are litigation support software tools to search and dissect your databases including erased e-mails, discarded and hidden data, so the foot-print is always there to be found. For major disputes, computer forensics can investigate and analyse data to reproduce time critical events and communications, break encryption codes and passwords, and locate deleted data.

Re-creating time critical events is also a crucial element of e-disclosure. The courts use key word searches to define the scope of the database search to find information. As e-disclosure is a complex and time consuming process, the English courts apply a relevance test where they limit the scope of discovery to relevant documents and agreeing the key words to be searched on the database. The courts are generally reluctant to exclude a party from inspecting documents, so a big issue for the disclosing party is confidentiality and access to inspect documents. In the US, e-disclosure tends to be used more for a fishing expedition, where the litigating parties go for wider disclosure, although the US courts are moving to the ‘relevance test’.

So for managers, what does this mean for managing the risk of commercially sensitive, or inappropriate, information being disclosed in open court during a commercial, dispute? If a company is involved in legal proceedings, then they need to be aware of how much of their content management systems and data can be retrieved and subject to disclosure to their opponent. Content management systems and user protocols are essential.

Outside legal disputes, and in the normal day to day running of an organisation, managers need to manage the risk of staff deliberately, or unintentionally, sending e-mails or creating e-records that could undermine, or even destroy, the business they work for, if for whatever reason those records were used as evidence against the organisation. Even in routine commercial dialogue with customers and suppliers, staff may be inadvertently making contractual commitments on behalf of their employer, many of which may be unauthorised, and some of which could result in financial loss or damage to their brand and reputation.

For technology businesses and those with branded products or services where protecting and managing the intellectual property rights of the business is vital, the protection of those intellectual property rights and know-how, and managing the risk of deliberate or inadvertent leakage, is critical. Now, in many commercial transactions and tenders, data rooms are being established with controlled access, which records all inspections of that data.

In the technological age of different communication medium, and with increasing regulation on businesses, managers need to set clear Internet User Policy and E-Mail User Protocols for staff, and also to have a set of risk management policies for staff which include protocols for managing the creation and integrity of all e-records and voice-mails created by each member if staff.

If they do not, then if they end up in court, they could be surprised, and very embarrassed, by what their staff have said and done on their behalf. The resulting financial costs could be severe, and at worse, even destroy the business, as some of the biggest companies have discovered to their cost.

© IPM 2008
William Baillieu is a director of Intellectual Property Management Ltd
www.ipmventures.co.uk

Valuation is not a science, and there is no universally accepted valuation methodology, however there are three general categories of valuation methodology in the valuation of any intellectual asset. These are the cost approach, the market approach, and the income approach.

The cost approach is used to arrive at the value of the asset by ascertaining the amount required to replace the asset. The underlying assumption is that the price of the new asset is commensurate with the economic value of the service that the new asset can provide during its life. The main disadvantage of this method is there is no correlation of cost with value. Compare the value of the micro-chip which is measured in billions, and the cost to invent it, which was minimal, or the respective costs to create and market value of new software technology which never actually works.

The market approach, arrives at the value of an asset by comparing valuations derived from similar asset classes in published transactions. But this depends on an active and public market, with a record of exchange of comparable assets. This is a particular problem when valuing human capital, so even if comparables can be found, it is essential to factor in the time of the comparable transaction and the quality of the workforce. Also, the nature of the negotiation process, which satisfies some parties but not others, will dictate whether or not a particular transaction is published.

The income approach, applying discounted cash-flow methodologies allowing for time, risk and cost of money, takes the present value of the future income streams and future economic benefits that the workforce can create. This approach involves quantifying the future cash and/or profit flows and calculating the present values of those flows. Those future returns do not stop at the end of any given projected period, and so a terminal, or horizon value, needs to be calculated which is also discounted back to net present value. The discount rate to be applied to the cash-flows can be derived in a number of different models.
Of the three methodologies, the market approach has considerable difficulties because of the lack of information in the public domain involving the transfer of workforces. This approach could be useful, however in the valuation of small and select groups of staff with special skills such as corporate finance teams, or specialist technology or engineering teams.
The income approach is equally difficult in that it can be impossible to separate the financial benefit attributable solely and exclusively to the workforce.
The most commonly used methodology in valuing workforces is therefore the cost approach. This can be approached in two ways, as a percentage of the total package for each employee, or a group of employees as appropriate, or estimating the actual cost to recruit, hire, and train a replacement workforce. These costs will be considerable and will include salaries and benefits of employees involved in recruiting replacement employees, overhead costs, head-hunter recruitment fees, direct recruitment and hiring expenditure and the like.
Adjustments to the cost of creating that workforce may need to be made. Negative adjustments include where there are excess employees to the assembled workforce and so redundancy costs are to be borne, or where there is a high training cost. Positive adjustments include establishing a premium value to a proven team who have a consistent record of delivering measurable results together.
Such adjustments to value illustrate that directors can take positive steps to enhance the value of their human capital. Business culture and economic reality means that there is no job for life, and loyalty between employer and staff is less than it was. So if full value is to be realised, a workforce needs to be contractually bound to the company, with restrictive covenants, so the income they generate sticks with the company.
As human capital is highly mobile, a workforces’ knowledge is only for rent in the form of salaries. This is an asset, which is impossible to own in perpetuity. So managers and investors need to understand how to protect, manage, exploit and value this most moveable of assets.
In the last decade huge benefits have been exploited by large companies when they focus on actively managing and exploiting their know-how. Knowledge Management, and the value of Intellectual Capital, are now important tools and measurements of value, and stock markets recognise these hidden values by the simple fact that most quoted companies trade on a significant premium to their net tangible assets. So the markets are recognising that earnings depend on the know-how of a business, and that the physical assets are playing a less important role in terms of valuing a business. The same applies to smaller businesses.

Understanding and defining value for a workforce should not be just to support a fund-raising, IPO or sale price. It should also be an important measurement to drive investment decisions in the business, so that the management can track how shareholder value is being built and demonstrate to outside investors how the business strategy and investment in people will deliver investment returns.

After decades of a corporate culture in the UK of failing to invest in the training of staff and seeing it only as a cost, understanding the value of human capital and its investment returns should see a shift to nurturing what is now the most important asset of any business – its people.

William Baillieu is a director of Intellectual Property Management Ltd
E-mail: bb@ipmventures.co.uk

The infamous ‘equity gap’, where an investment opportunity is too small for institutional and corporate investors but which can appeal to business angels, is no more obvious than for knowledge based businesses who have an innovative product or service and who need to raise finance. How many times has UK plc been the place of invention, only for an overseas company to turn it into a mass market product and to reap the rewards of commercial exploitation?

Bankers and investors find it difficult to fund knowledge businesses unless it has legally protected its intellectual property rights, and has a clear business strategy and understanding for building value.

The most valuable assets of every business are its name and reputation, its technical and product know-how, its staff and customers. To the world of accountancy this is goodwill, and intangible assets when shown on the balance sheet are quickly discounted by accountants and bankers alike. How can this be in the age of the knowledge economy and when there are such spectacular success stories?

Consider how valuable brands like Manchester United, Virgin, and Formula 1 are today, or designs like Chris Dyson’s vacuum cleaner. Patents now extend to software and not just mechanical inventions, and designers can register their designs in just the same way as you can register a patent or a trade-mark. Publishers build valuable copyright portfolios, and database rights exist as a new legal right.

In the last decade huge benefits have been exploited by large companies when they focus on actively managing and exploiting their know-how. Knowledge Management, and the value of Intellectual Capital, are now important tools and measurements of value, and stock markets recognise these hidden values by the simple fact that most quoted companies trade on a significant premium to their net tangible assets. So the markets are recognising that earnings depend on the know-how of a business, and that the physical assets are playing a less important role in terms of valuing a business. The same applies to smaller businesses.

For SME’s and start-ups, how does the entrepreneur protect and exploit its know-how? More importantly, how does an entrepreneur raise venture capital when all the business has is an innovative product or service, and little or no tangible assets for an investor/lender to secure against?

Valuation Management, part of the Valuation Consulting group, advises businesses on protecting, managing and exploiting know-how to change knowledge into profit and to create real shareholder value. VM takes a practical staged approach:

First, identify what know-how you own. Intellectual Property Rights include patents, designs, trade-marks, copyright, database rights, and confidential information. Intangibles include contracts supporting joint ventures and strategic alliances, domain names, affinity marketing programmes to exploit databases and much more.

Second, protect those assets by securing the most appropriate form of legal protection, but first make sure you are taking a practical and commercial approach. There is no point registering and paying for a patent if you cannot make money from it.

Third, manage those knowledge assets. If you do not know or care about your company’s know-how and its costs and values, why should your staff, suppliers or customers care or value it? So define and communicate your IP management policies to staff and customers so they understand its value, and that you will police and challenge any unauthorised use.
Create audit trails so if anyone copies or misuses that know-how, you can challenge and stop them quickly. Link IP management into the business and marketing plan, so costs and revenue are identified.

Fourth, set a clear exploitation strategy. There are many different licensing strategies, and the best feature of intellectual property rights is that it can be exploited in different ways. Issues include setting the right royalty rate, transferring IPR to low tax jurisdictions, and developing contracted income streams so a banker will lend against those Rights.

Finally, understanding the valuation of a business and its intellectual property rights is vital. There are different ways to value know-how, and it is a specialist field. Valuation will be supported by how rigorous the IP is protected and managed, and the marketing strategy and channels to market to be used. Understanding and defining value is not just to support a fund-raising or sale price. It should also be an important measurement to drive investment decisions in the business, so that the management can track how shareholder value is being built and demonstrate to outside investors how the business strategy will deliver investment returns. The valuation of the company’s shares can also support the pricing of share options for key staff.

For investors who want to buy into a growth business where there is a clear opportunity to exit from the business and realise their investment within typically 4 to 7 years, they want to understand present and future valuations for the company’s know-how. When they make their investment, they and the entrepreneur will negotiate a price for the deal.

Investors often say entrepreneurs are unrealistic, and entrepreneurs complain venture capitalists are greedy. Perhaps they are both right, but an understanding of valuation, and a clear business strategy for protecting, managing and exploiting its know-how, will bridge the equity gap.

William Baillieu is a director of Intellectual Property Management Ltd
E-mail: bb@ipmventures.co.uk