Equality agreements allow the transferring organization to appropriate the value of knowledge transferred and diffused within the organization, and commercially realized through auxiliary implementation. As such, equity arrangements are economically preferable to royally agreements when:
reVc > rlVp
Where re is the equality stake as a percentage, Vc is the value of the company, rl is the royalty rate and Vp is the commercial value of the product. Now suppose that both the equity stake and royalty rate coefficients accurately represent the transferring organization’s relative contribution to commercial success of the firm or product, respectively. This may be accomplished, in theory, as the rates may be adjusted such that ex post revenues to the transferring organization are equal.
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