Realizing the Value of Intellectual Property through Intellectual Property Financing
December 01, 2022
Written by: Bianca Lindau and Andrew Alexander
What is a company’s most valuable asset today? The answer is quite arguably its intellectual property (“IP”). Consider the largest companies by market capitalization on the S&P 500: you will find Apple Inc., Microsoft Corp., Amazon.com Inc., Alphabet Inc. (Google), and Tesla Inc. occupying many of the top spots on that list. Technology firms largely dominate the top ten spots, and most of their value stems from intangible assets. According to the latest study conducted by Ocean Tomo LLC, a long-time purveyor of intangible asset trends, intangibles now account for 90% of the S&P 500 market value. Intangible assets in that study include patents, trademarks, copyrights, and corporate and government preference rights. With intangible assets—particularly IP like patents and trademarks—having such a high value, it is important to understand how this IP can be monetized, whether you are a global corporation or a start-up. One lesser-utilized (but emerging) means of monetizing IP is using it as collateral (“IP financing”). This can offer substantial advantages to IP owners, including allowing your company to raise capital without diluting ownership interests. Here is a brief overview of the types of assets that are eligible for IP financing and the financing practices that are available.
What types of IP assets can be leveraged in exchange for financing?
When assessing whether and how easily IP can be leveraged for IP financing, it is helpful to view IP in two categories—namely informal IP and formal IP. Patents, trademarks, and copyright material are all formal IP. Formal IP can be easier to value; for example, one can often value it by expected or observed cashflow. know-how, research and development, critical partners, suppliers, and customers, branding, reputation, technology, business processes, and data. Determining the value of informal IP is more difficult. For example, it can be more difficult to properly articulate informal IP’s metes and bounds or directly tie informal IP to revenue streams. Those characteristics make informal IP less attractive for IP financing. A proper valuation of the IP, separately from other company assets, is crucial to collateralizing the IP.
What IP-related financing tools are available?
IP is monetized in three primary modes: licensing it in exchange for royalties; selling it; and using it as collateral to raise funds. The most traditional method of monetizing IP is by licensing trademarks or patents in exchange for royalties. Selling IP is also rather traditional. An emerging format for selling IP is by auction, which can provide IP owners quicker access to the sale (and thus the consequent funds) than having to individually seek out an ideal buyer. The third method (using IP as collateral) is increasingly referred to as IP financing. IP is most often collateralized through four methods: IP-backed loans, IP royalty securitization, litigation finance of IP, and IP sale-leaseback.
Businesses have long utilized lending to raise capital. Lending provides immediate liquidity and can often be had, if collateralized, without diluting ownership interests. Many are familiar with using tangible assets as collateral for loans—things like real estate, equipment, or inventory. But many are not familiar with the much newer (and growing) practice of using IP as collateral for loans. This newer practice can offer distinct advantages to companies. For example, it can provide early-stage and technology-based companies with access to loan capital even when they have few tangible assets, which many do not. But they often have, or can obtain, IP. Moreover, the value of a company’s IP may well dwarf that of its tangible assets, no matter what the company’s size or development stage. That means it is likely that any company of any size with IP would find it advantageous to look to IP to collateralize loans instead of tangible assets. Just as in more traditional lending formats, each IP asset or set of assets is valued to inform the amount and terms of an IP-backed loan—and the relevant security interest must be perfected in accordance with applicable laws.
IP Royalty Securitization
Royalties flowing from an IP licensing agreement can be utilized as the underlying asset for a securitization. In those arrangements, future cash flow expected from a licensing agreement is sold by the IP owner in exchange for an upfront cash payment. IP royalty securitization allows the IP owner to retain ownership in the IP and can provide a relatively easy and comparatively low-risk means to borrow money from lenders. These arrangements can be quite flexible depending on the circumstances and particular IP at issue, and specific risks to the IP owner like the lender’s recourse options (if any) are primarily determined on a per-agreement basis.
IP Litigation Finance
IP infringement litigation is a kingpin of IP monetization. But it is also very expensive. Litigation financing allows an IP owner to enforce its exclusionary power (e.g., the power to exclude others from practicing a patent’s claims for a period of years) via infringement litigation without having to pay the upfront costs of litigation. Most often, the financier claims a stake in the IP’s exclusionary value as collateral by requiring a portion of the damages (akin to royalties) earned in the suit—and very often without recourse to the IP asset itself. This can provide several advantages to the IP owner. The most apparent is likely that it puts much of the cost-risk of litigation on other parties (e.g., the financier). Perhaps less apparent advantages are the nearly endless ways in which parties, their legal counsel, and financiers can structure these financing deals to suit a particular circumstance. Those arrangements can also aid obtaining legal counsel to litigate the matter by reducing counsel’s reliance on contingency fees; a firm may receive some of their fees and expenses upfront from the financier. That can mean improved access to the justice system for IP owners—and ultimately, the IP owner’s ability to monetize its hard-earned property.
The IP sale-leaseback involves the sale of the intellectual property owner’s IP to a new owner, with an immediate “lease” back of the right(s) from the new owner, by providing the original IP owner with a license to use the transferred rights. A buyback provision may be included, enabling the original IP owner to repurchase the IP after a certain period of time. The IP sale-leaseback is attractive in situations where there is a pressing need for cash, as it provides immediate liquidity to the original IP owner.
Caldwell’s Corporate Practice provides advice tailored to our clients’ needs regarding IP financing. We work closely together our firm’s patent prosecution and litigation departments—and with firms who specialize in IP-backed lending and IP litigation financing.
To learn more about IP financing and how we can help, please contact us today.