Cs207 8
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This document contains summaries of topics discussed in a CS207 class on software valuation and intellectual property: 1) The first section outlines topics to be covered in the class, including why software should be valued, principles of valuation, market value of software companies, intellectual capital/property, patents/copyrights/trade secrets, open source software, the life cycle of innovations, and business models. 2) Later sections summarize discussions on open source software licensing obligations, recognition of trade secrets under federal law, examples of corporate structures using offshore holdings, and long-term effects of shifting capital and intellectual property to tax havens. 3) Key concepts covered are tax benefits of jurisdictions like Bermuda and the Cayman
![Sue us if Open Source SW,
you can ! addendum for class#1
from a 10-K report
• Certain of our software (as well as that of our customers) may be [is]
derived from “open source” software that is generally made
available to the public by its authors and/or other third parties.
• Such open source software is often made available to us under
licenses, such as the GNU General Public License (GPL), which
impose certain obligations on us in the event we were to [for]
distribute[ing] derivative works of the open source software.
• These obligations may require us to make source code for the
derivative works available to the public, or license such derivative
works under a particular type of license, rather than the forms of
licenses [it] customarily used to protect our intellectual property.
• In the event [If] the copyright holder[s] of any open source software
were to successfully establish[their rights] in court that we had not
complied with the terms of a license for a particular work, we could
be [must] required to release the source code of that[our] work to
the public and/or stop distribution of that work.
11/18/2011 CS207 3](https://image.slidesharecdn.com/cs207-8-111118231430-phpapp01/85/Cs207-8-3-320.jpg)
![Forest Labs flow
[from Business Week 14 May 2010]
0. Initial transaction:
0. Initial transaction ($17+0.11 Irish tax)
IP rights transfer
IP rights transfer
to Bermuda
to Bermuda $64 FLI
FFBV
Cost $5
IP rights
Forest
Labs.Research, $76
St. Louis, MO FRX
FLR
6 a
$99 $5 b
$7 FLH
7 $50 available for new investment?
$2.38 US taxes for public use
[Design Hermann Zschiegner]
11/18/2011 CS207 5](https://image.slidesharecdn.com/cs207-8-111118231430-phpapp01/85/Cs207-8-5-320.jpg)
![Problems
• There is a lack of trustworthy data
1. $ 209M spent [US commerce department, 2003]
+ 4 663 jobs lost [U.S. labor dept, 1Q04]
2. $2 400M income [Business week, in 2003]
+ 50 000 jobs gained [Indian NAS&S Cos, Fy04/4]
• Attitudes are inconsistent
Greenspan 1: IP rights have assumed increasing importance [27Feb03]
Greenspan 2: Our economy is best served by full and vigorous engagement in the
global economy – when defending reducing protection [11Mar03]
18-Nov-11 CS207 15](https://image.slidesharecdn.com/cs207-8-111118231430-phpapp01/85/Cs207-8-15-320.jpg)
![Not all taxhavens
are offshore: Delaware
Formal
HQ of HQ of
Coca-Cola, Ford, General Motors,
Google, Hewlett Packard, Intel, Kentucky
Fried Chicken, Texas Instruments and
200,000 more corporations
owner:
Corporation Trust,
a subsidiary of
Wolters-Kluwer, a
Dutch publishing house.
11/18/2011 CS207 [Shaxton:11] 18](https://image.slidesharecdn.com/cs207-8-111118231430-phpapp01/85/Cs207-8-18-320.jpg)
![ Symmetry
Exports and Transfers go both ways
• There is innovation everywhere
• If the U.S. imports IP, the receiver should pay
Basic and fundamental research in the U.S. is declining
Growth was motivated by WW II experience [Vannevar Bush]
Many countries now fund fundamental research
The ratio of applied to basic research is increasing
Industrial research is mainly applied
Technological research is rarely basic
Development requires more resources B F A D
Industrial and management infrastructure
Good in the U.S
Demonstration and Beta sites - early adopters
18-Nov-11 CS207 20](https://image.slidesharecdn.com/cs207-8-111118231430-phpapp01/85/Cs207-8-20-320.jpg)
Cs207 8
- 1. CS207 #8, 18 Nov 2011 Gio Wiederhold Gates B12 Drafts of reports received by 22Nov11 will receive feedback by 26Nov11 . Any make-up reports submitted by 17Nov11 are marked on the sign-up sheets. 11/18/2011 CS207 1
- 2. Syllabus: 1. Why should software be valued? 2. Principles of valuation. Cost versus value. 3. Market value of software companies. 4. Intellectual capital and property (IP). 5. The role of patents, copyrights, and trade secrets. 6. Open source software. Scope. Theory and reality 7. Life and lag of software innovation. 8. Sales expectations and discounting, Licensing. . 9. Alternate business models. 10. Separation of use rights from the property itself. 11. Risks when outsourcing and offshoring development. 12. Effects of using taxhavens to house IP. 13. Acquisitions and growth 11/18/2011 CS207 2
- 3. Sue us if Open Source SW, you can ! addendum for class#1 from a 10-K report • Certain of our software (as well as that of our customers) may be [is] derived from “open source” software that is generally made available to the public by its authors and/or other third parties. • Such open source software is often made available to us under licenses, such as the GNU General Public License (GPL), which impose certain obligations on us in the event we were to [for] distribute[ing] derivative works of the open source software. • These obligations may require us to make source code for the derivative works available to the public, or license such derivative works under a particular type of license, rather than the forms of licenses [it] customarily used to protect our intellectual property. • In the event [If] the copyright holder[s] of any open source software were to successfully establish[their rights] in court that we had not complied with the terms of a license for a particular work, we could be [must] required to release the source code of that[our] work to the public and/or stop distribution of that work. 11/18/2011 CS207 3
- 4. Trade Secret Addendum class #6 There is at least one type of trade secret that is recognized by federal law: • Exclusive access for 4 or 12 years to • Small molecules ● biological material the `sponsor’ of IP material collected for Clinical trial data Software to design drugs Drug-making processes Software to control drug-making processes Even though the information must be made available to the FDA for drug approval. 18-Nov-11 CS207 4
- 5. Forest Labs flow [from Business Week 14 May 2010] 0. Initial transaction: 0. Initial transaction ($17+0.11 Irish tax) IP rights transfer IP rights transfer to Bermuda to Bermuda $64 FLI FFBV Cost $5 IP rights Forest Labs.Research, $76 St. Louis, MO FRX FLR 6 a $99 $5 b $7 FLH 7 $50 available for new investment? $2.38 US taxes for public use [Design Hermann Zschiegner] 11/18/2011 CS207 5
- 6. Structure MNC California Parent: I MNC P Malaysia,India +Holland +Palm Island CFCs: CFH: MNC JB CONCH MNC MY Advisor: CFI: $ ATA CAAS $ €£¥ 11/18/2011 CS207 6
- 7. interactions CAAS control profit MNC € US CONCH € MNC Maniac € LSA € manu- design € € facturing costs MNC JB MNC US 11/18/2011 CS207 7
- 8. Taxhavens Places where 1. Taxes are low 2. Financial and IP supervision is minimal 3. Reporting requirements are minimal • Two types 1. Primary tax havens (about a dozen countries) Small populations, Can live largely of license fees o Cayman Islands: pop. 50K, 90K companies @ 3000/year 2. Semi-taxhavens (more, but often changing) Large populations, need jobs Enact, often temporary, tax benefits for foreign work 18-Nov-11 CS207 8
- 9. With Taxhavens: Three-party flow Parent corporation Offshore job sites Salaries Initial Inte- purchase $ $ gration High- License $$ fees value Sub corporation Products “CFH” IP docu- mentation purchased the rights to 18-Nov-11 CS207 9
- 10. Capital and IP creates more IP and Income Capital and IP Capital & IP in CFH at source Income Income 18-Nov-11 CS207 10
- 11. Job Flow @ different levels of personnel $ IP Parent ------------------------ CFC Is knowledge transmitted from the top or acquired from experience at the bottom? Gio Wiederhold IP havens 11
- 12. Capital flow with a taxhaven Controlled Foreign Holding Company CFH CFC Source I PIP IP license IP Creator IP consumer Buy-in Tax havens: Income Income Capital and IP Vanuatu Royalties Cayman islands Capital Barbados Capital US Fees Foreign taxes taxes Tangibles are harder to move than IP 18-Nov-11 CS207 12
- 13. Longer term effect • Repatriation of $$ from the CFH to the US is taxed. • Current workers are paid by the CFH. US and offshore employees are unaware of the source of their paycheck The CFH acquires an increasing fraction of the IP The CFH is paid an increasing fraction of the income The CFH in time can becomes richer than the company. • It is more efficient for the company to invest in low-tax countries and create jobs there. Job losses in the U.S. increase • Eventually the CFH can buy the parent company. Control by stockholders is gone as well 18-Nov-11 CS207 13
- 14. Effects over time 18-Nov-11 CS207 14
- 15. Problems • There is a lack of trustworthy data 1. $ 209M spent [US commerce department, 2003] + 4 663 jobs lost [U.S. labor dept, 1Q04] 2. $2 400M income [Business week, in 2003] + 50 000 jobs gained [Indian NAS&S Cos, Fy04/4] • Attitudes are inconsistent Greenspan 1: IP rights have assumed increasing importance [27Feb03] Greenspan 2: Our economy is best served by full and vigorous engagement in the global economy – when defending reducing protection [11Mar03] 18-Nov-11 CS207 15
- 16. Related Intellectual capital issues Not all intellectual capital is owned, property, IP 1. Education: Services that transmit valuable, but non-proprietary knowledge to others. If receiver pays, certainly can take it anywhere If the state pays, can it / should it be reimbursed? Now not. 2. Publication: IP placed into the public domain is no longer IP Who benefits? The reader gets knowledge / The writer gets fame Society becomes more egalitarian, effective • These 2 aspects can easily confuse IP discussions 18-Nov-11 CS207 16
- 17. Flows are messy Fabless chip manufacturer Typical FCM Delaware MNCS MNCA FCM-D Sales One-time SG&A Design & development Cost- Buy-in IP share 6-year rights IP: pay- U.S. royalty tranche designs ments offshore U>S. FCM-H FCM-I IP use licensing International Ltd BV docu- profit Netherlands Isle of Man ments, Owns knowhow FCM-I US Ireland Offshore Revenue Revenue ~40% Chip and board manufacture offshore ~60% FCM Products OEM fabricators, US and offshore
- 18. Not all taxhavens are offshore: Delaware Formal HQ of HQ of Coca-Cola, Ford, General Motors, Google, Hewlett Packard, Intel, Kentucky Fried Chicken, Texas Instruments and 200,000 more corporations owner: Corporation Trust, a subsidiary of Wolters-Kluwer, a Dutch publishing house. 11/18/2011 CS207 [Shaxton:11] 18
- 19. Future: Outsourcing and IP export Need Increased understanding and accounting for IP exports (making them visible) To rationalize political concern by populists & traditional conservatives versus strong lobbyists pressures and globalists Correct pricing, licensing and its taxation of IP exports • will increase corporate profits in the U.S. • reduce cash in offshore accounts, more for U.S. investment • provide taxes that could be used to compensate • for R&D support provided by the government • for educational costs • for unfunded retirement benefits of workers whose IP was outsourced • Is unlikely to stop offshoring substantially • Amounts would be large in a number of cases • But …. 18-Nov-11 CS207 19
- 20. Symmetry Exports and Transfers go both ways • There is innovation everywhere • If the U.S. imports IP, the receiver should pay Basic and fundamental research in the U.S. is declining Growth was motivated by WW II experience [Vannevar Bush] Many countries now fund fundamental research The ratio of applied to basic research is increasing Industrial research is mainly applied Technological research is rarely basic Development requires more resources B F A D Industrial and management infrastructure Good in the U.S Demonstration and Beta sites - early adopters 18-Nov-11 CS207 20