Use Your Patents to Grow Your Company

We typically consider patents as the primary asset in an IP-backed loan, although we also consider trade secrets and company data as valuable assets to loan against. A software company’s code base may also be collateralized, but typically as a secondary asset.

Trademarks occasionally can be considered, but they are on a case-by-case basis.

A typical borrower may have at least a handful of patents, but often has 10-50 patent assets as collateral.

The effective interest rate for a patent loan will be in the neighborhood of mid- to high-teens.

In some cases, we can offer loans in the low-teens, but that is usually reserved for companies with especially good cash flow.

Please note that this rate is much lower than angel or venture equity, which is typically 50% or more. By taking a loan against the assets you already created, you can get much further without having the negative effects of selling your equity to investors.

A patent loan will come with several other components, including insurance for patent enforcement and patent defense.

Because a patent loan is specifically designed to help you expand your business, we want you to focus on generating revenue, not litigation. Therefore, we give you at least $2,000,000 in patent enforcement insurance and patent defense insurance.

The due diligence process for the loan program will include due diligence for the other insurance product

The patent loan program requires several items about your patents and your business plan.  This is not a complete list.

100% ownership of your patents.

Your patents must be completely unencumbered and must be owned by the operating company. Some investors might attach liens to the intellectual property, which is a non-starter.

In many cases, inventors “forget” to assign their rights to a company – if that happens, we won’t touch it.

There are countless ways a startup company might not have full, unrestricted rights to “their” IP, but we will require all of the ownership assignments be completed before we start consideration for a loan.

The patents must be the highest quality.

Everybody believes their patents are good, but sadly, at least 95% of all patents are worthless.  Patents fail our due diligence for many different reasons, such as being over-broad, not having any prior art references, being poorly written, mistakes in patent prosecution, and countless others.

One of the biggest ways patents fail is that there may be other ways to solve the same problem.  If the patent does not capture the single best way to solve a problem, your competitor will just use the alternative solution and never need to take a license from you.

The business needs to be at the right stage.

A good loan candidate can put capital to use – but must be able to repay the loan.  Startups that are in the ‘idea phase’ are not good candidates because they probably have not built out their manufacturing, marketing, and sales pipelines. 

A good candidate has tested a marketing and sales funnel and knows their Cost to Acquire a Customer, along with a projected Lifetime Value.  They have developed enough sales to know what works and what doesn’t, and they can put a large amount of cash to use to generate revenue quickly.

Another type of candidate needs operating capital, such as to purchase inventory for an existing order or for ongoing expansion.  These companies typically have access to small amounts of capital, but a collateralized loan will give them much more.

Infringed patents can help (or hurt) your chances for a patent-backed loan, depending on the situation.In some cases, we put together an enforcement plan alongside a loan, where the loan gets paid off with the proceeds from the enforcement. In those cases, the enforcement and loan work hand-in-hand.

In general, infringement of your patents is a good indicator that your patents have value.

We prefer to provide loans to revenue generating companies, but we will consider pre-revenue companies in some cases.

The loan program is a loan, after all, and we will evaluate your company to see if we believe that you will be able to repay the loan. Taking out a loan is much different than selling equity, and our focus is on real revenue generation.

Pre-revenue companies need to show that they are very close to revenue. In general, we want to see that the company is addressing a real need in the market, that there is economic value in the product or service being sold, and that the cost of goods leaves a solid profit margin. We also want to see that the cost to acquire a customer is known and that there is a delivery pipeline to satisfy that customer.

In short, we want to see that there is a legitimate business opportunity in your company.

Please note that we want to have real data to support the assumptions, such as experiments in customer acquisition methods, quantified analyses of the costs to build the product or supply the services, procedures for after-sale support, or whatever is appropriate for your business. We are looking to loan money to those companies who can really put the money to use, and we are less likely to provide funding for the experimental or developmental phases of building your company.

This is a fair question, as some IP-backed lenders are more of a “distressed debt”-type lender, who focus on enforcement.

We prefer operating companies where the mindset is to grow the company (and maybe exit to acquisition/IPO).

We do not have a “loan to own” mentality.

We want you to succeed.

When you grow your company and generate more sales, the IP (our collateral) has more value.

We succeed when you succeed.

Patent valuation is a difficult subject because there are many different people using many different techniques to come up with a ‘value.’

In general, the only meaningful metric of patent value is revenue.

Either you are selling a patented product, or an infringer is selling an infringing product.

The value of the patent is determined by comparing the patented product against a competing product that does not infringe the patent. If we can tease apart the extra amount of sales that comes from the patented product, then we have the best indicator of the patent value.

If there are no sales of the product, the patent does not have realizable value – YET. Once sales are established and we have an apples-to-apples comparison to a non-infringing product, only then can be put a meaningful value on the patent.

We evaluate your IP to see if we believe there is enough collateral to underwrite a loan.

If we like the IP and your business prospects, we offer a term sheet with a proposed loan.

Sometimes, we have the option to get an “insurance wrapper” on the collateral – an insurance policy that ‘guarantees’ the value of the underlying assets. But this is not a requirement for our loans.

A typical loan will be 2-5 years in length and may have an interest-only period.

We have great flexibility to give you the loan you works exactly for your business.

This is not a one-size-fits-all loan. It is bespoke – directed at what you need.

No. The patent loan program does not normally require a personal guarantee.

We provide an insurance product that will guarantee a lender in case of a default. However, a lender may still have the final say as to whether or not to require a personal guarantee.