Differentiating Between Debt and Equity is Key to Successfully Financing with IP Rights

In the world of startup funding, intellectual property (IP) assets are often perceived as the company’s most valuable assets—but how that value is realized can vary dramatically depending on whether a company is raising capital through Debt or Equity funding. While most early-stage entrepreneurs instinctively seek venture capital (VC) or angel investors (both types of Equity funding), the role of Debt financing—especially when collateralized by IP—is an often overlooked, yet strategically critical option.

As it turns out, IP has different value propositions depending on the type of investor and the form of capital being deployed. For founders and investors alike, understanding these distinctions can mean the difference between scalable success and missed opportunity.  This is illustrated in the chart below, which lays out two dimensions of investment activity: Debt v. Equity, and Institutional (banks, VC funds) v. Strategic (corporate) investors.  Each of the quadrants highlights the association that each type of investor has with the IP value of its underlying investment targets:

Equity Funding: Investors Can Realize Strategic and Growth Value of IP

Equity investors are shareholders, and as such, they are buying into future value and strategic growth. They care about how your IP supports revenue growth, competitive market position, and long-term exits. Moreover, in Equity funding situations, IP needs to be strategically aligned with the company’s business model. For example, software startups may rely less on patents and more on trade secrets, copyrights, and customer data early on, while biotech companies build robust patent portfolios to support licensing models from day one. Aligning your IP strategy with your go-to-market plan—and communicating that clearly to equity investors—is essential.

Venture capitalists will often discount IP value if they perceive it as defensive-only or irrelevant to scaling. This makes it critical for entrepreneurs to educate investors not just on the existence of IP, but on how it contributes to “pivot value” (upper right quadrant) which represents growth opportunities into adjacent markets or new products, as well as exit potential. The “synergistic value” (lower right quadrant) is especially relevant in M&A situations, where strong IP positions can command premiums because they fill in gaps for acquirers or protect key competitive advantages.  Strategic equity investors (corporate venture) are best suited to realize this value due to their connections to the parent corporation.

Debt Funding: Liquidation Value Rules!

In Debt funding situations, IP assets can be pledged as a collateral for a loan.  For IP-rich startups with positive cash flows, venture debt—a hybrid structure that combines a traditional equity raise with a loan—can provide additional growth capital without the extra dilution.

Venture lenders and other specialized financial institutions who lend against IP collaterals are fundamentally focused on risk mitigation. Since loans are fixed income instruments, where the return is mostly limited to the interest on the loan, debt investors care less about the growth potential of your company and more about what those IP assets could worth if the company defaults on its loan. In other words, IP must have liquidation value (upper left quadrant) to be relevant to debt financing.

This means that patents, brands, and other IP assets used as a collateral need to be valued not by what they could earn in a thriving business, but by what they might fetch in a distressed sale. Notable cases like Nortel (patent portfolio sold for $4.5 billion in a bankruptcy auction) or Bed Bath & Beyond (brand auctioned in-bankruptcy) highlight that IP can be monetized even when the business fails; but unlike these landmark cases, in most liquidation situations, IP assets will typically be sold at a discount to fair market value. According to a paper published by the Harvard Law School, more than 40% of bankrupt companies sell at least one patent, and on average they sell 18% of their patent portfolios. In most liquidation situations, IP assets will typically be sold at a discount to fair market value.

Finally, in the not-so-common situations when the lender is a strategic investor, there could be a higher monetization value (lower left quadrant) when the lender takes over the IP collateral, as there may be synergies with the corporate lender’s own assets leading to more lucrative options than just a distressed sale.

Key Takeaways: IP Strategy Can Determine Funding Strategy

In today’s dynamic funding environment, it is critical to understand how a startup’s IP value aligns with the type of capital it is pursuing. Whether raising debt or equity, your IP strategy should be tailored to what each type of investor values the most.

Ultimately, differentiating between debt and equity isn’t just a legal or financial technicality—it’s a foundational IP strategy decision. Debt capital providers want enforceable, transferrable, and independently valuable IP assets. Equity investors want strategically positioned assets that enhance growth and exit outcomes.

** The original version of this article appeared in IP CloseUp.

See the full article in the October issue of the Licensing Journal by clicking the link below:

Differentiating Between Debt and Equity is Key to Successfully Financing with IP Rights