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Is it common practise to grant a venture debt lender a first security priority lien on all assets including IP?

We are a software company and in the process of raising venture debt. Some lenders we are speaking to have asked to grant them a first security priority lien on all assets including intellectual properties. Is it a common practise? What do we have to give up if we propose to carve out the IP? thanks,

Answers

Anonymous
(Consulting CFO and Business Operations Advisor) |

Anon,

The indicated request is a near-universal *request*, and depending on your situation may be a *requirement*. As you are a SW company, I would guess that you'll find that it is a requirement, and that there is no carve-out possible. Seriously, if you remove the IP from a software company, you've got a bunch of bills to pay and not much else.

Now, do they get a sole priority, or are they just in first place with a bunch of others? That is probably more negotiable, but would need to be clearly stated and would have other restrictions on what else they would be sharing priority on. I *can* see them walking away on this term, however, as it is their poison-pill to make you meet your commitments, and failure to grant this suggests that they would get caught up and couldn't collect. If there are other lenders involved with whom they are comfortable, I could see them giving on that...but not much else.

The outlier is if you are majority controlled by a VCs or similar with whom they are comfortable, you'll likely be able to get better terms.

Regards,

Anon

Topic Expert
Brian Best
Title: Managing Director
Company: Leader Ventures
(Managing Director, Leader Ventures) |

Yes, it is common but not always a requirement. The larger the deal size the more likely that an IP lien will be required. Do keep in mind that an IP lien does nothing to change the priority between the lender and your VC investors rather it puts the lender in front of other creditors such as landlords. If you do end if in a workout situation it is often easier to negotiate a deal with a lender who works with your investor's other portfolio companies than it would be negotiating with a bankruptcy trustee.

Collateral position in general is one of many terms that can be traded off. Often it can be traded for a more restrictive structure, smaller deal or additional pricing. Think about what you are giving up as you may well decide that giving up IP isn't that big of an issue.

Topic Expert
Mike Rose
Title: Managing Director
Company: Montage Capital
LinkedIn Profile
(Managing Director, Montage Capital) |

Yes, very common. Other posts here have done a good job articulating the details around the I.P. lien as it relates to debt financing. Two additional points are (1) that most documents are clear that the lender's lien will not impede the company's ability to license its technology in the ordinary course of business, which is an important caveat as this is clearly something that happens in the software industry frequently. (2) There is also the ability to secure a "negative pledge on I.P." as part of the documentation process, which contractually commits the borrower from permitting any liens be filed against I.P. during the term of the loan.

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