In my October 16, 2012 Blog I discussed a lesser-known financing model and listed three companies providing funds under that model with varying individual focuses and parameters. Under that model a company receives a loan and pays it back over time out of revenues that it earns, thereby avoiding a fixed payment schedule that the company may have trouble meeting. Furthermore, this method involves debt financing therefore dilution to equity positions of existing owners is also avoided.
Another lesser-known financing model is sometimes referred to as Intellectual Property (IP) structured finance. Generally to raise funds under this model a company must own or have alienable rights to IP. Additionally that IP must currently be producing income (royalty streams) or have a high probability of producing royalty streams in the future. A company may be thought to have a high probability of producing future royalty streams if its IP has been licensed to one or more major companies who are in the process of productizing such IP.
This model also avoids the risks inherent in a fixed payment schedule and owner dilution as payments are made from royalty streams. However, it may cause a decrement in the perceived or actual value of the company securing the financing as the IP, under a standard IP structured finance scenario, is transferred to a separate legal entity. The IP is transferred to a Special Purpose Vehicle which is typically a trust, partnership, limited liability company or stock corporation. The primary purpose of this transfer is to isolate the IP from the original owner’s credit risk. Structured properly, this method can provide a company the opportunity to leverage its IP and expected future cash flows therefrom into currently available cash.
For more details on this type of structure check out alseT IP, a company providing such financing. That is a rather odd name but with meaning. IP stands for Intellectual Property and alseT is Tesla spelled backwards. Telsa was a prolific inventor with over 700 patents to his name. He was a contemporary of Thomas Edison and even worked with him for a time.