Empirical evidence illustrates the extraordinary scale of this transformation. According to a report by Ocean Tomo, an intellectual property valuation and consulting firm, approximately 90 percent of the market value of S&P 500 companies was derived from intangible assets, compared with less than 20 percent in the late 20th century.¹ As firms depended more on innovation and intellectual property, traditional asset-based lending became less applicable to high-growth sectors. As creditors shape whether innovation is preserved, transferred, or abandoned during financial distress, the governance role of intellectual-property collateral raises questions about how creditor rights should function in innovation-driven sectors.
Financing Innovation Under Conditions of Uncertainty
Innovation-driven firms frequently lack tangible collateral, burn through cash and depend on contingent factors such as product development, regulatory approval, and market adoption. For lenders, this complicates traditional risk assessment and recovery strategies. Liquidation of physical assets often provides little protection because enterprise value resides in intangible items that may deteriorate quickly if operations collapse.
As financing expanded into innovation-driven sectors, intellectual-property collateral emerged as an important tool for managing risk. Security interests in patents, software, and other intangible assets provide lenders with protection while also shaping borrower incentives and restructuring negotiations.
Lenders must protect their investments and enforce their contractual rights. From the lender’s perspective, the central concerns are safeguarding capital and preserving the value of the firm so that the loan can ultimately be repaid. At the same time, decisions about whether to restructure or liquidate a struggling firm have broader consequences. Premature liquidation may destroy valuable knowledge, disrupt employees and other stakeholders, and cut short innovative activity that could generate long-term economic benefits. In practice, lending decisions therefore involve two distinct considerations: the lender’s financial interest in protecting and recovering capital and the wider economic interest in preserving productive capacity and sustaining innovation under conditions of uncertainty and limited information.
Intellectual Property Collateral as a Governance Mechanism
Intellectual property has become a mechanism of governance. Security interests in patents, software, and related assets shape bargaining power between lenders and borrowers, influence restructuring negotiations, and affect whether innovation remains within a firm or migrates to new owners.
Traditional commercial lending developed under very different economic conditions. For much of the 20th century, credit decisions were anchored in tangible collateral and predictable cash flows. Banks relied on assets such as real estate, inventory, and equipment that could be monitored, valued, and liquidated if a borrower defaulted. Because enterprise value was closely tied to physical capital, recoveries depended primarily on asset coverage rather than on preserving the strategic continuity of the business.
That model fits poorly with many contemporary technology and venture-backed firms. Startups often possess little tangible collateral even when they have strong growth prospects and substantial equity sponsorship. Their value instead resides in intellectual property, data, technical knowledge, and scalable business models. As a result, lenders increasingly rely on intellectual property as collateral, making control over these assets a central element of financing innovative companies.
The growing use of intellectual property as collateral raises a broader governance question: who ultimately controls innovative assets when firms encounter financial distress?
Venture Lending and the Emergence of Intellectual Property Collateral
Venture and technology lending emerged in part to address the mismatch between traditional asset-based lending and the financing needs of innovation-driven firms. Rather than relying primarily on liquidation value, lenders increasingly evaluate sponsor quality, access to equity capital, and the scalability of a firm’s business model. Research suggests that roughly one-third of venture-backed firms incorporate debt instruments into their financing structures.²
In this environment intellectual property became central because it represents both recoverable value and strategic leverage. In many technology-driven firms, patents, software, and proprietary technologies constitute the most durable component of enterprise value. Empirical research suggests that lending increases when intellectual property assets can be transferred or acquired by other firms.³ When such markets exist, collateral improves expected recovery by creating potential buyers for distressed assets.
The effectiveness of intellectual property collateral, however, depends heavily on legal structuring. Security interests must be properly documented and perfected in order to remain enforceable in bankruptcy proceedings. Unperfected security interests leave lenders with unsecured claims.⁴ Lenders devote significant attention to documentation, collateral priority, and enforceability in all secured lending. These issues are particularly salient in intellectual property–backed loans, where the legal framework for perfecting and enforcing security interests can be more complex than for traditional forms of collateral.
Governance in the Zone of Insolvency
The governance implications of intellectual property collateral become most visible when firms approach financial distress. Many consequential decisions occur before formal bankruptcy, in what is often described as the “zone of insolvency.” During this period a firm may still be operating and raising capital, but its long-term solvency has become uncertain.
In the zone of insolvency, the incentives of shareholders and creditors begin to diverge. Shareholders retain the possibility of upside if high-risk strategies succeed, but their downside is limited because their equity may already be impaired. Creditors, by contrast, bear a substantial portion of the remaining downside risk. Legal scholarship suggests that legal rules governing creditor and shareholder rights can influence firm behavior during this period by limiting incentives for shareholders to pursue excessively risky strategies that shift losses onto creditors.⁵
Creditor Influence in Innovation Restructuring
In these circumstances lenders will not sit by as passive claimants. Through contractual rights, monitoring authority, and capital allocation decisions, they often shape restructuring outcomes. Private-credit governance research emphasizes that lenders frequently influence distressed firms through covenants, renegotiation authority, and oversight mechanisms.⁶ In some cases, concentrated creditor control can improve coordination among creditors and reduce collective-action problems. When claims are held by a small number of lenders, renegotiation becomes easier, monitoring is more centralized, and holdout incentives are reduced. These features can make value-preserving restructuring more feasible and reduce the likelihood of inefficient liquidation.⁷
One of the most consequential lender tools is rescue capital. New financing can allow a firm to continue operating long enough to pursue restructuring, asset sales, or strategic partnerships that increase recovery value. Such financing is rarely neutral; it is typically accompanied by additional collateral, priority claims, or expanded governance rights. Research on relationship banking suggests that lenders with long-standing relationships with borrowers may be more willing to extend or renegotiate credit during periods of temporary distress, particularly when doing so preserves enterprise value that might otherwise be lost through premature liquidation.⁸
At the same time, enforcement of creditor rights can sometimes improve economic outcomes. When innovative firms fail, their intellectual property may retain substantial value even if the original company cannot continue operating. Bankruptcy proceedings and secondary markets for intellectual property can allow these assets to be transferred to firms better positioned to develop and commercialize them.
For example, following the bankruptcy of Nortel Networks, a consortium of technology companies including Apple and Microsoft acquired the company’s telecommunications patents for approximately $4.5 billion. Similarly, when Eastman Kodak entered bankruptcy in 2012, it sold digital-imaging patents to Apple, Google, Microsoft, and other technology firms. These transactions demonstrate how intellectual property developed by distressed firms can be redeployed by other companies operating in the same technological domain.
Empirical research on patent sales in bankruptcy suggests that these transactions frequently involve core technologies and often occur early in restructuring processes, enabling valuable innovations to be transferred rather than abandoned.⁹
Principles for Responsible Innovation Lending
These developments highlight the evolving role of lenders in innovation finance. Through collateral rights, covenants, and restructuring authority, creditors increasingly influence how technological capabilities are governed when firms encounter financial distress. Because these decisions can determine whether valuable innovations are preserved, transferred, or lost, they raise important questions not only for private contracting but also for public policy.
This reality suggests the need for a clearer policy framework for responsible innovation lending. Three principles are particularly important.
First, capital discipline must remain credible. Credit markets function effectively only when contractual rights are enforceable and risk-taking is constrained. Second, lenders should prioritize innovation continuity whenever appropriate. In many cases the most effective way to preserve innovation may involve restructuring or transferring intellectual property to new operators rather than immediate liquidation. Third, fairness and transparency should guide restructuring decisions. Distress inevitably redistributes losses, but responsible lenders should balance the interests of investors, employees, customers, and other stakeholders.
As innovation finance evolves, these governance decisions will become more complex. New forms of enterprise value — such as artificial intelligence systems and large-scale data assets — are even more dependent on continuity and coordinated management than traditional intellectual property is. In this environment, ethical judgment becomes a practical requirement rather than a purely theoretical concern. Lenders must navigate trade-offs between financial discipline and the preservation of innovation, between contractual enforcement and stakeholder impact.
The growing importance of intellectual-property collateral therefore raises broader questions about creditor governance in the innovation economy. In sectors where enterprise value is largely intangible, collateral is no longer merely a tool for recovery. It has become a mechanism through which the future of innovation itself is often determined.
REFERENCES
1. Ocean Tomo, Intangible Asset Market Value Study (Feb. 9, 2026).
2. Nicolas Figueroa & Nicolas Inostroza, Optimal Screening with Securities,
J. Econ. Theory (2025).
3. Yael V. Hochberg, Carlos J. Serrano & Rosemarie H. Ziedonis, Patent Collateral,
Investor Commitment, and the Market for Venture Lending, 130 J. Fin. Econ.
74 (2018).
4. Ira L. Herman, Security Interests and Lien Priorities, Blank Rome LLP Client
Alert (Oct. 19, 2022).
5. Bo Becker & Per Strömberg, Fiduciary Duties and Equity-Debtholder Conflicts,
NBER Dig. (Apr. 2011).
6. Douglas G. Baird & Robert K. Rasmussen, Private Debt and the Missing Lever
of Corporate Governance, 154 U. Pa. L. Rev. 1209 (2006).
7. Patrick Bolton & David S. Scharfstein, Optimal Debt Structure and the
Number of Creditors, 104 J. Pol. Econ. 1 (1996).
8. Arnoud W.A. Boot, Relationship Banking: What Do We Know?, 9 J. Fin.
Intermediation 7 (2000).
9. Song Ma, Joy Tianjiao Tong & Wei Wang, Selling Innovation in Bankruptcy
(Tuck Sch. Bus., Working Paper, 2018).
Michael A. Santoro is a professor at Santa Clara University’s Leavey School of Business, and Colton Vale is an associate at Silicon Valley Bank. This post is based on their recent article, “Intellectual Property Collateral and the Governance of Innovation Finance,” available here.