Cramdowns, Receivership, Bankruptcy – Why Patent Financing is Good for Founders and Angels.

BlueIron’s patent financing puts your IP in a Special Purpose Vehicle (SPV) – an LLC that holds your patents. It can be thought of as a lease with a buyout option – similar to leasing a car. A special feature is that it can help you survive a cramdown, receivership, or bankruptcy of your portfolio companies.

Our contracts have a special provision called a Third Party Beneficiary Agreement.

The Third Party Beneficiary Agreement allows anyone you chose, including you or your investors, to take over the license arrangement if there is a default.

Why does this matter?

The sad truth is that most startup companies will fail and many will go through some down periods before they get traction. In many cases, there will be a down round, cramdown, or other recapitalization of the company in order to shed some baggage. These steps are unfortunate but necessary to put the company in position to raise more money and (hopefully) succeed.

In many cases, early investors – especially the founders – can get diluted down or even removed during these events. They no longer have a seat at the table, and the new investors want to remove the capitalization table overhead that puts them at a disadvantage.

This is where BlueIron’s Third Party Beneficiary Agreement comes into play.

The Third Party Beneficiary Agreement is an option – not an obligation – to take over the patent license agreement when the company goes into default. This allows someone such as the founder or an early angel investor to take over control of the IP portfolio.

When a company’s assets are acquired in a receivership or bankruptcy, or during a cramdown, down round, or other recapitalization, taking control of the IP portfolio changes the dynamics of the situation.

For example, a founder or early stage investor who takes over the IP portfolio during one of these events now has a seat at the table. They have some power to negotiate terms that may not wipe them out. In the end, they need the company to be successful, just like new investors will, but they can at least be part of the conversation.

Founders and angel investors do not like to hear about the dirty parts of the business. Cramdowns, down rounds, and the like are never discussed in accelerators, incubators, or pitch contests, but they are part of the lifecycle of companies.

Angel investors can dramatically improve their overall Internal Rate of Return by squeezing some juice out of their “loser” deals. Patent financing with BlueIron is one way to improve your odds.