Just as title to your home can serve as collateral for a home improvement loan, your startup’s IP can serve as collateral for a business loan. Smart lenders will record a “security interest” with the United States Patent and Trademark Office (“USPTO”) when that collateral is a pending patent application, an issued patent, or a registered trademark.
But investors and entrepreneurs take note. Via the security interest, which is typically treated as a lien on the IP and granted to the lender via a clause in the lending agreement, if your company goes bankrupt the lender potentially can force liquidation, and thereby, ownership of the collateralized IP will automatically transfer to the lender. That clause also will contain a requirement that, at the time of liquidation, your company provide any assistance needed to formalize and record a written assignment of any relevant IP (issued patents, pending patent applications, and registered marks) with the USPTO.
Investors should be extremely wary of security interests, as the lender will have senior rights to every investor. Should liquidation occur, those senior rights will wipe out each investor’s financial investment in the startup. Thus, savvy investors typically avoid making an equity investment in any startup whose IP is covered by a security interest. Likewise, savvy entrepreneurs will avoid signing an IP-secured note, as doing so will very likely discourage any future investment until the loan is discharged.