Leveraging Intellectual Property With Asset-Based Lenders

One of the tactics popular in the era when there were more asset-based lenders was to use intellectual property as collateral.

Why? Because certain types of intellectual property, while having actual value to the marketplace, to competitors, and valuable in producing future streams of income, can be relatively inexpensive to produce.

The licensing rights of a brand name, for example, if the reputation of a company has largely been produced by inexpensive publicity, may be every bit as valuable as brand recognition produced by much more expensive advertising.

There are two reasons why a lender might be interested in securing a financial relationship with your imaginary collateral that you probably dreamed up while you were in the shower.

The asset-based lender controls a borrower with carrots and sticks. If they can foreclose on Trump's right to use his own name in business deals, for example, they've got a pretty big stick.

The second factor is what the bank has to gain. Ideally, they may stand to gain financially by licensing out those rights to the highest bidder.

Lenders don't really stand to gain very much from foreclosure. They'd much rather be repaid, with interest. But they know you'll be better motivated to repay if you stand to lose something valuable.

If a lender is willing to enter into a secured loan, you might put up your house, your car, the property you're buying, for example, and any other property you might own.

But some entrepreneurs figured out something about working with these lenders.

If you stand to lose OR they stand to gain in the event of default, they're happy. Preferably both.

But if they stand to gain, all the better. What's the value of intellectual property? Lucasfilm was reportedly bought for billions in cash and stock. So it's not insubstantial.

Unless George Lucas owned a Star Wars skyscraper somewhere that I don't know about, the hard assets of the company amounted to some foam rubber masks and a Chewie costume when he sold it. A few cans of celluloid. Some hard drives.

But billions of people have a good feeling associated with Star-Wars-ish thingies, and to stripmine that rich well of possibilities like they did with Star Trek, they needed the rights.

A Star Wars version of The Next Generation, Deep Space 9, Voyager and Enterprise, you say?  Hmm. I love the smell of royalties in the morning!

"Someone call F. Ford Coppola! We want Godfather the TV show and we'll buy the rights for Enron shares!"

I kid you not. The name Enron will be revived in some form, merely for the name recognition. Corporate America has that little respect for the public. You'll be able to sleep in the Enron twin towers built on the site of the Vegas shooting for twenty bucks a night. Hey. That's capitalism.

As I understand it, Lucasfilm is 99.9% fairy dust. Imagination. You take away the employees and a few drawers full of contracts, scripts, and some tax filings, and you've got nothing. So it's all about the lights, shadows, the sounds and recordings.

It's so many piles of plastic that could all easily fit on a bunch of hard drives somewhere. How much for that?

More than 4 billion dollars. Why? People saw the movie. That's why. Lucas proved his competence at milking it for decades. He's probably better at licensing than anything else.

He's the Gene Simmons of movies.

Practical Applications:

Aren't you listening? The Enron hotel is going to be a smash hit! We'll cure cancer with it. But seriously...

Maybe you're an entrepreneur who wants to build a company to produce an invention of some kind. You file for a provisional patent and approach a lender, and sign away all the rights in the event of default.

What are your options? You have at least a few.

You could simply license your patent to a competitor instead, and be entitled to a modest percentage of sales. Whatever you can negotiate. Maybe 5% of the gross sales for the life of the product, which, in capable hands, might be 20 years or more.

Stream of income. Which is good. How much debt could you service with 5% per year? A pretty good amount, considering the game of robbing Peter to pay Paul is standard operating procedure around the world. Which means by working a little financial wizardry, Loan 2 pays off Loan 1.

Loan B pays off Loan A. The question is... how do you pay off Loan B?

Volume.

Actually, it's conceptually not as difficult as you might think. Easier said than done, but most people would rather work hard than study hard and think hard, so they never figure out what they ought to be doing with their lives.

You can buy up revenue streams or get controlling interest in assets you can further leverage.

You might consolidate an industry and take it public.

You might buy controlling interest in an insurance company, so that each $50 of investment controls a pool of $100 worth of premiums. Or something like that.

It ain't like it's rocket science. Unless you're competing with Elon Musk.

Nowadays, the word on the street is companies are getting around patents more easily, so that many of the features on an iPhone are also available on an Android phone, delivering a nearly identical user experience.

A patent's not worth as much as it used to be in the good old days. Pledge a patent as collateral, and they won't necessarily throw tens of millions of dollars at you instantly.

But it's a step in the right direction.

If your invention added a useful feature to the marketplace that a company like Microsoft or Google or Apple might want to buy, you could make a compelling case that the patent is worth a fortune in the long term, or that you sincerely believe it will be, which is the only reason why you're refusing to license it to a big tech company.

In either case, what matters is what the lender believes.

And how do lenders make decisions? Based on facts, data, graphs, and charts?

No!

Not unless they're too autistic for any ordinary human being to tolerate their presence in the business world.

See the Big Short to see how rare a fact-based decision-maker is in America. In a nutshell, the financial crisis of 2008 is the charming story of big financial firms taking a gigantic dump in their right hand, polishing it up all pretty so it fetches top dollar, and then buying it back with their left hand to eat like it's chocolate cake.

Cool. I just summarized a whole book in one sentence. (The movie is based on the book. And yes, Wall Street really did sink. Just like the Titanic. But in both cases, the book was better.)

Like I said, people don't make decisions with facts. So I don't treat people like they do.

If a lender has a feeling, that's better than a fact. He makes huge life decisions based on a gut feeling.

It's a good thing you can always trust your gut. Ever been married?

Before you get married, do you complete a statistical analysis of the probabilities and cost of divorce?

If so, as your investment advisor, I'd suggest looking at other options more likely to fit your investment profile.

There's almost a 50% chance of an expensive, painful divorce that feels like being dragged behind a truck for 20 years.

If you haven't considered marriage, might I suggest investing in a more traditional, conservative model that's built to last with minimal maintenance during the warranty period?

"A wife isn't an investment!" you say?

"LOL. No.  She most certainly is not."

But would a asset-based lender accept her as collateral? Maybe.