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Intellectual property management can be one of the most important responsibilities in an organization. Recently, there have been several developments that help organizations appreciate the full scope of flexibility available to them in terms of unlocking the value of their patents, trademarks and other intangible assets. One of the most overlooked methods for utilizing the value of IP is its use as collateral. This activity is becoming more common as increased cash flows associated with the licensing of IP catch the eye of Wall Street. The highest-profile examples of these transactions are probably the securitized royalty streams on the copyrights owned by famous songwriters like David Bowie and James Brown. However, there have been numerous instances of valuable trademarks and highly productive patents being utilized in this capacity as well.
A number of reasons exist as to why an IP owner might be interested in pursuing this kind of strategy. First, it can provide a method for transferring some of the risk associated with licensing the intellectual property. If the financing is nonrecourse, the risk of receiving royalty payments from a licensee is transferred to the investors. Also, some of the risk associated with infringement and obsolescence is transferred.
Second, it may increase the return the owner earns on the IP through increased leverage. This is because the present value of impending royalty streams is being collected in a lump sum today rather than spread out over the future. This lump-sum payment can then be invested in current projects that feature an internal rate of return higher than the cost of the financing. Any upside potential residing in the IP is typically retained by the IP owner as well.
Third, it provides a source of capital that does not dilute the current equity structure. With venture capital discounts typically in the range of 25 percent to 50 percent, this is very beneficial when compared to equity sources of financing, especially for smaller technology companies. An additional benefit: the interest payments are tax-deductible. This helps to offset a portion of the discount taken as a result of the present value analysis used to determine the size of the lump-sum payment.
For the purposes of this discussion, intangible assets fall into one of two categories: those...