Navigating Intellectual Property, IP Valuation in Insolvency and Bankruptcy, Secured Creditors, and Royalty Collection in Tech Start-Ups with the MacDonald Partnership Limited (“TMP”)

Navigating Intellectual Property, IP Valuation in Insolvency and Bankruptcy, Secured Creditors, and Royalty Collection in Tech Start-Ups with the MacDonald Partnership Limited (“TMP”)

 

Key Takeaways

  • Understanding the impact of insolvency or bankruptcy on the value of intellectual property (IP) is crucial for businesses facing financial distress.
  • There are specific steps to take when valuing IP during insolvency or bankruptcy to ensure the most accurate assessment.
  • Secured creditors have a priority claim over IP assets compared to unsecured creditors in insolvency proceedings.
  • Even in insolvency, tech start-ups can strategise to maximise royalty collection from their IP.
  • Knowing your rights and options can protect and potentially enhance the value of your IP during tough financial times.
  • Navigating the process is complex however we are very experienced and can navigate the process with you. Reaching out for a consultation to explore your options directly with the head of restructuring at TMP on +44 (0)20 3819 8600 or email: Libby.Aird-Brown@tmp.co.uk

Essential Guide to IP Assets in Financial Distress

When a company faces financial challenges, one of the most critical yet often overlooked assets are its intellectual properties. IP assets can include patents, trademarks, copyrights, trade secrets, and even proprietary software. But when the ship starts sinking, what happens to these valuable assets? Most importantly, how can you, as a business owner, protect and leverage them even in the stormiest financial weather?

Impact of Insolvency on Intellectual Property Value

Insolvency doesn’t mean your IP loses all its value. In fact, IP can be a lifeline. Here’s the thing: IP assets are unique because they don’t exist physically, yet they hold significant value. However, their worth can fluctuate, especially when a company enters insolvency. Why? Because the future of the IP—whether it will continue to generate revenue or not—is uncertain. But, by taking the right steps, you can preserve or even increase the value of your IP assets.

Key Steps to Valuing IP During Insolvency or Bankruptcy Proceedings

To get started, you need to understand the valuation process. Valuing IP in insolvency involves several key steps:

  • Identification: First, you need to identify all the IP assets owned by the company. This might seem straightforward, but it can get tricky if the IP isn’t properly documented or if there are joint ownership issues.
  • Assessment: Next, assess the current use of these assets and their potential use in the future. Could another company use your patented technology? Is your brand strong enough to survive a sale?
  • Valuation: Then, you need to determine the value of the IP. This is where you might need an expert. Valuation methods can include the cost, market, and income approaches. Each has its pros and cons, and the right choice depends on your specific situation.
  • Monetisation Strategy: Finally, you must develop a strategy to monetise the IP. This could mean licensing it out, selling it outright, or even continuing to use it if the business is restructuring.

Remember, your goal is to get the most out of your IP assets, even when the rest of the business is struggling.

Cracking the Code of IP Valuation in Bankruptcy

Valuing IP is more art than science, especially in insolvency or bankruptcy. The uncertainty of the business’s future means that traditional valuation methods might not apply. Instead, you’ll need to think outside the box. Consider how the IP might be used by a buyer, not just how it’s been used in the past. And don’t forget to account for the legal protections each type of IP offers—they can significantly impact value.

Approaches to Valuing Intellectual Property

There are a few common approaches to valuing IP:

  1. The cost approach looks at what it would cost to recreate the IP. It’s straightforward but doesn’t always reflect the true market value.
  2. The market approach compares the IP to similar assets that have been sold. This can be helpful, but it’s not always easy to find comparable sales.
  3. The income approach estimates the future income the IP will generate and discounts it to present value. This method can be the most accurate but requires a lot of assumptions about the future.

Because the value of IP can be highly speculative, especially during bankruptcy, it’s often best to use a combination of these approaches to get a more balanced valuation.

Rights of Secured vs. Unsecured Creditors in IP Assets

In bankruptcy, not all creditors are created equal. Here’s the lowdown:

  • Secured creditors have a claim on specific assets as collateral for their loans. If you used your patent as security or collateral for a loan, the lender has a right to it if you can’t pay back the loan.
  • Preferential creditors don’t have a claim to specific assets. They fall in line behind the secured creditors until they have been paid.
  • Unsecured creditors don’t have claims on specific assets. They get in line and hope there’s something left after the secured and preferential creditors are paid.

Understanding the difference is critical because it affects who gets paid first and how much your IP might be worth to them.

Stay tuned as we dive deeper into the nuances of IP valuation in bankruptcy, the role of preferential creditors, and strategies to keep the royalty checks coming even when times are tough.

Strategising IP Royalty Streams During Financial Hardships

When your tech start-up hits a rough patch, your IP still holds potential to be a steady source of income. The key is to keep those royalty streams flowing. But how? You’ve got to be smart about your licensing agreements and proactive in collecting royalties.

  • Review your existing licensing agreements to ensure they are still enforceable and that licensees are meeting their obligations.
  • Negotiate new or modified agreements that might offer more favourable terms during the insolvency period.
  • Stay on top of royalty collections, perhaps by employing a service that specialises in this area to ensure you’re not leaving money on the table.

Remember, your IP could be more valuable than you think. Even if your start-up is struggling, your IP might be thriving in someone else’s hands.

For instance, imagine you developed a unique software platform. Despite financial woes, other companies are using it and paying royalties. By focusing on these agreements and ensuring they are honoured, your start-up can maintain a revenue stream that could keep you afloat or even facilitate a turnaround.

Licensing agreements can be complex, and renegotiating them in times of financial hardship requires a delicate touch. But, with the right approach, these agreements can provide a lifeline for your business.

Tools for Ensuring Continual Royalty Revenue

So, you’ve got these IP assets and agreements in place – great! But ensuring that you continue to receive royalties is another challenge. You need the right tools and strategies to manage these agreements effectively.

Here are a few tools that can help:

  • IP management software can help track licensing agreements, renewal dates, and royalty payments.
  • Engaging an IP lawyer or a specialised IP management firm can be invaluable for navigating complex negotiations and ensuring compliance.
  • Consider using escrow services for royalty payments to provide a level of security for future payments.

These tools can help you maintain oversight of your IP assets and ensure that you’re maximising their value, for the benefit of your creditors, even when other parts of your business may be faltering.

Risk Assessment and Mitigation for Tech Start-Ups in Insolvency

As a tech start-up, your IP is often your most valuable asset. But with the threat of insolvency looming, it’s vital to assess and mitigate risks to your IP portfolio. Doing so can mean the difference between a complete collapse and a chance at recovery.

Identifying and Managing Intellectual Property Risks Pre-Bankruptcy

Before insolvency or bankruptcy becomes a reality, you should conduct a thorough risk assessment of your IP assets. This means understanding not just what you own, but also how it’s protected, how it generates revenue, and its overall value to your business.

Consider the following:

  • Are all your IP assets properly registered and documented?
  • Are relevant codes secure and protected?
  • Do you have clear records of all licensing agreements and royalty payments?
  • Are there any pending legal disputes over your IP that need to be resolved?

Addressing these questions can help you strengthen your position and prepare for the possibility of insolvency. By securing your IP assets, you ensure they remain a valuable and unencumbered part of your portfolio.

For example, if you have a patent that’s not properly registered, you might find it challenging to assert your rights to it during insolvency proceedings. By making sure everything is in order beforehand, you protect your assets from becoming entangled in legal battles that could diminish their value.

Options for Tech Start-Ups to Preserve IP Value Post-Insolvency

  • Consider selling non-core IP assets to generate immediate cash flow.
  • Explore the possibility of entering into strategic partnerships or joint ventures to continue developing and profiting from your IP.
  • Look into restructuring options that might allow you to retain control of your IP while reorganising your business.

After a company has entered insolvency, it’s not the end of the road for your IP assets. You still have options to preserve and even enhance their value.

Take the story of a mobile app developer who, firstly, despite facing insolvency, ensured their IP was secure.  They then entered a formal rescue and restructuring process (a company voluntary arrangement (CVA)) giving them breathing space to secure new investment.  The new investment gave them the ability to terminate the CVA. These moves not only provided immediate funds but also ensured the app continued to be developed, with a  recognised increased value and a stable platform for the future. TMP drove this process from start to finish to ensure the appropriate outcome.

Being proactive and creative with your IP can open doors to new opportunities, even in the most challenging of times.

FAQs About IP Valuation, Insolvency and Bankruptcy

Got questions about IP valuation and bankruptcy? You’re not alone. Here are some common queries and straightforward answers to help you navigate these complex issues.

What happens to my IP if my company enters insolvency?

If your company enters insolvency or is bankrupt, your IP assets become part of the insolvent estate. They may be sold to pay off creditors, or you might be able to retain them, depending on the type of insolvency process and negotiations with creditors.

How do we value intellectual property in an insolvent or bankrupt scenario?

Valuing IP in insolvency or bankruptcy requires a thorough analysis using various methods like cost, market, and income approaches. Often, a combination of these methods, along with expert input, will yield the most accurate valuation.

Can an insolvent company still earn royalties from its IP?

Yes, an insolvent company can still earn royalties from its IP. This income can be crucial for paying off debts or funding a restructuring plan.

What are my options to protect IP value during insolvency?

Each case is different but to protect IP value during insolvency, you might be able to sell or license IP assets, enter into strategic partnerships, or pursue restructuring options that might allow you to retain control of your IP.

Are there alternative ways to monetise IP assets in financial distress?

Yes, alternative ways to monetise IP assets in financial distress include licensing agreements, outright sales, and forming joint ventures with other companies.

How does insolvency or bankruptcy affect IP licensing agreements?

Insolvency or Bankruptcy can affect IP licensing agreements in various ways. There may be clauses in the agreements that automatically terminate the agreement in the event of bankruptcy or an insolvency process. Agreements may need to be renegotiated, and some might be rejected by the Insolvency Practitioner, Liquidator or Administrator as onerous contracts. It’s important to review all agreements and understand your rights and obligations.

What is the role of IP valuation experts in insolvency or bankruptcy?

IP valuation experts play a critical role in insolvency by providing accurate assessments of IP value, advising on monetisation strategies, and often serving as expert witnesses in court proceedings.

Can IP be transferred during a company’s insolvency process?

Yes, IP can be transferred during a company’s insolvency or restructuring process, either as part of asset sales approved by the creditors, or the court or through licensing agreements to generate revenue for the estate.

However, any transfer of IP must ensure it’s in the best interest of the creditors. It’s a delicate balance between maximising returns for the creditors and maintaining the integrity of the IP.

Who are the secured creditors in an IP-related insolvency case?

When a company enters insolvency, not all creditors are treated equally. Secured creditors are those who are given priority over others when it comes to the distribution of the company’s assets. In the context of IP, secured creditors, such as banks or financial institutions that have loaned money against the IP as security or collateral, are typically at the top of the list. They have a legal right to seize the IP assets if the company fails to repay its debts. It’s crucial to understand where you stand in this hierarchy because it affects the likelihood of recovery to each stakeholder.

What are my options to protect IP value during insolvency?

Protecting the value of your IP during insolvency is about taking proactive steps to minimise losses and maximise returns. This is not the time to be passive; it’s the time to act with strategy and foresight.

  • Review your IP portfolio and identify which assets are core to your business and which could be sold or licensed.
  • Negotiate with creditors to find mutually beneficial solutions that preserve the value of your IP.
  • Consider restructuring options that allow you to retain control over your IP while navigating financial challenges. This may include ‘formal’ insolvency procedures.

For instance, if you own a patent for a popular software application, consider licensing it out to another company instead of selling it outright. This way, you maintain ownership and the potential for future income, while also generating immediate cash flow to help with current financial obligations.  Your actions must ensure you protect the position of your creditors and maximise their interests.

Are there alternative ways to monetise IP assets in financial distress?

Imagine you’re a tech start-up with an innovative algorithm, but you’re facing cash flow issues. This is very common.  Instead of selling your algorithm outright, you could enter into a revenue-sharing partnership with a larger company. This way, you retain some ownership and benefit from the larger company’s resources and market reach, potentially increasing the algorithm’s value and your long-term profits.

Alternative monetisation strategies can offer a lifeline for companies in financial distress. Besides the traditional routes of selling or licensing IP, you can explore options like:

  • Revenue-sharing agreements.
  • Creating spin-off companies to hold and manage IP assets.
  • Crowdfunding or seeking venture capital based on the strength of your IP portfolio.

Each option comes with its own set of considerations, but they all share the common goals of:

  • leveraging your IP to improve your financial situation.
  • Seeking to maintain control over your most valuable assets.
  • Maximising the return for creditors – which is a legal priority when a company is facing insolvency.

How does insolvency affect IP licensing agreements?

Insolvency can significantly alter the landscape of IP licensing agreements. Existing agreements may be scrutinised, and in some cases, rejected by the Liquidator, Trustee or Administrator if they’re not deemed beneficial to the creditors. If you’re in the midst of insolvency, it’s essential to review all licensing agreements to understand your rights and obligations. You may need to renegotiate terms or even seek court approval for new agreements that can provide a source of revenue during the insolvency process.

Is it possible to reclaim IP sold in an insolvency process?

It’s important to understand that insolvency processes are primarily designed to liquidate assets and satisfy creditors’ claims. Therefore, it’s best to explore all other options, in good time, prior to entering an insolvency process.  This will potentially ensure the ability to retain your IP and maximise the position for your creditors.

Rescue and restructuring options also exist. These options are often complex, requiring careful navigation.

 

Reaching out for a consultation to explore your options directly with the head of restructuring at TMP on +44 (0)20 3819 8600 or email: Libby.Aird-Brown@tmp.co.uk

Please let us know if you found this article helpful or interesting when you make contact. It also helps us to learn how you discovered us. Thank you for considering TMP. We are a friendly team and always happy to help and advise.

 

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