Definition
In finance, patents refer to exclusive legal rights granted by the government to an inventor or a company for a certain invention, design, or process for a specified period. They prevent others from making, using, or selling the invention without authorization. Patents are considered intangible assets in a company’s balance sheet and can significantly increase a firm’s value.
Key Takeaways
- Patents represent a form of intellectual property rights, providing its holders exclusive rights to their innovation. They can prevent others from using, making, or selling the patented invention, thereby offering a competitive advantage.
- In finance, patents may be considered as intangible assets. They add value to a company’s worth and can be sold, licensed, or used as collateral to secure loans. Their value, however, can be difficult to quantify due to their unique and specialized nature.
- The lifespan of a patent is often time-bound, typically 20 years from the date of filing. After the expiry, the patented invention enters the public domain, and others can exploit it.
Importance
Patents are important in finance because they represent a form of intellectual property right that grants legal protection for an invention. This protection allows the owner exclusive rights to the patented process, design, or invention for a certain period of time, thus creating a potential source of revenue or competitive advantage.
The value of patents can be monetized through commercializing the invention, licensing the technology to others, or selling the patent rights. These potential revenue streams can be factored into a company’s financial valuation and analysis.
Furthermore, patents can act as collateral in financial transactions, and may play a critical role in mergers, acquisitions, or funding negotiations. Therefore, understanding the financial implications of patents is key to business and investment strategy.
Explanation
Patents play a vital role in the world of finance, particularly in respect to businesses and their strategic growth plans. They primarily serve the purpose of protecting intellectual property. A patent gives the patent holder, usually the inventor or assignee, the exclusive right to prevent others from making, using, or selling the invention or design for a set period, typically 20 years.
This exclusivity contributes to a company’s competitive advantage by preventing rivals from copying the unique aspects of their products or services. Hence, they stimulate innovation by motivating inventors and companies to continuously invest in research and development. In the realm of finance, patents can be significant assets and are often integral to the valuation of many firms, especially those in the technology and pharmaceutical industries.
The value of these patents can be used as collateral for loans or can influence an investor’s decision when funding a company. Their worth can dramatically shift a company’s fortunes or potentially even transform an industry. The quantity and quality of the patents a company possess, provide insights about its innovative capacity, acting as a type of intangible asset and contributing to the company’s overall market value.
Examples of Patents
Pharmaceutical Industry: One of the biggest users of patents is the pharmaceutical industry. For example, Pfizer held the patent for the popular drug, Lipitor, for a number of years. The patent protected the chemical compound of the drug, allowing Pfizer to be the only company to sell it and thus having the control over the pricing. This greatly increased the company’s financial return over the investment they made in the research and development of the drug.
Technology Industry: Tech companies, such as Apple and Samsung, consistently secure patents for their technological innovations. For example, Apple holds numerous patents relating to the iPhone including its design and the software applications that give certain functionalities. These patents not only protect their inventions, but they also provide revenue through licensing agreements.
Entertainment Industry: The Walt Disney Co. holds numerous patents to protect its technologies and creative works. An example of this is the innovative technology used in Disneyland’s Star Wars: Galaxy’s Edge attraction. These patents protect Disney’s financial interests by preventing other companies from duplicating their innovative technology.
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FAQ on Patents
What is a Patent?
A patent is a legal certificate given by a government that gives an inventor the exclusive right to manufacture, use, or sell an invention for a certain number of years.
What are the types of Patents?
There are three main types of patents: Utility Patents, Design Patents, and Plant Patents.
How long does a Patent last?
The duration of a patent depends on the type. Utility and plant patents last for 20 years from the date of filing, while design patents last for 15 years from the grant date.
How to apply for a Patent?
You can apply for a patent by submitting a completed application to the patent office in your country. You will need to provide specifications, drawings, and claims of the invention.
What is a Patent Troll?
A patent troll is a derogatory term used to describe a company that uses patent infringement claims to win court judgments for profit or to stifle competition. These companies don’t manufacture products or supply services based upon the patents in question.
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Related Entrepreneurship Terms
- Intellectual Property
- License Agreements
- Invention Disclosure
- Trademark
- Copyright
Sources for More Information
- United States Patent and Trademark Office: The USPTO is the federal agency for granting U.S. patents and registering trademarks.
- World Intellectual Property Organization: WIPO is a global forum for intellectual property services, policy, information and cooperation.
- Investopedia: A reliable source for finance and investing concepts including information about patents.
- Entrepreneur : The website provides information about patenting for entrepreneurs.
