How to Compute a Reasonable Royalty Rate

"Among the most frequently asked questions I get from start-up companies is: How much should I pay for licensing in a technology?...While most companies seem to use a valuation method I like to call "pulling a number out of the air," there are three primary methods used by licensing professionals to assess the value of IP assets. These are the Cost Method, Market Method and Income Method. With all of these methods, good data and data projection are critical in determining the appropriate numbers.

In the Cost Method, the value is the cost incurred in developing or purchasing the relevant technology or intellectual property....
In the Market Method, the method for determining value is to learn what comparable technologies have licensed for recently....
In the Income Method, value is the estimated revenues the technology is likely to produce (and savings it is likely to generate) and comparing this to the estimated cost to generate the same revenues or savings from other sources, that is, total annual returns. Basically, it's a method of determining what you can afford (or not afford) to pay in the end..."

Read more in this Patent Baristas post.