Smoke Detectors And Domino Effects: The Legal Side Of IP-backed Lending

IP-backed financing is having a moment and for good reason. According to Ocean Tomo's 2025 intangible assets report, intangible assets now account for 92% of S&P 500 value, and yet, as the World Intellectual Property Organization has observed, IP has been "largely invisible" in finance.

It's a disconnect that is starting to close, and the momentum is real, but so is the legal complexity. IP-backed deals require a different kind of legal architecture than traditional asset-based lending—one that reflects the unique characteristics of intangible collateral.

IP maintenance covenants are the heartbeat of the deal

Every IP-backed deal starts with the fundamentals - due diligence, representations and warranties, financial covenants. These get the deal across the finish line on day one. But what keeps it healthy for the next five, seven, or ten years? That is where IP maintenance covenants come in. Most protective clauses in a loan agreement are reactive—they show up after the fire starts. IP maintenance covenants are the smoke detectors. They run every single day, quietly making sure the collateral stays enforceable and valuable.

Cure rights and cross-defaults are connected

When a borrower trips a maintenance covenant, a well-structured deal provides a sequenced process —from notice, a cure window, to a defined set of outcomes. That is the theory. It's neat, orderly and sequential. Cross-default provisions are what can blow it all up. A cross-default clause means that a default under one agreement automatically triggers a default under another. In IP-backed financing, a single missed patent renewal can cascade across the entire capital structure, before anyone has even had a chance to fix the underlying problem. Cure clocks start ticking simultaneously across multiple lenders, resources get split, and the carefully negotiated safety valve becomes useless. The architecture matters enormously here, and it must be negotiated upfront. Synchronized cure periods, materiality thresholds, standstill provisions, waterfall mechanics; these are the tools that separate a deal that bends from one that breaks.

Think holistically about risk transfer

The best IP-backed deals do not rely on a single layer of protection. They stack them. The contractual toolkit, like IP indemnification, infringement remedy clauses, limitation of liability, open-source software provisions, and bankruptcy protections, provides the foundation. But contractual protections are only as good as the counterparty's ability to stand behind them. That is why it is strategic to layer insurance on top—IP liability coverage, warranty and indemnity products, collateral protection insurance. These products are growing more sophisticated every year, and the strategic deal teams are not choosing between contracts and insurance, but they are using both together, to build structures that can absorb a hit.

Looking ahead

IP-backed financing is not going to get simpler. Deals will get bigger, the structures more complex, and the stakes higher. But if the legal profession gets the architecture right—frameworks that protect lenders, preserve borrower flexibility, and reflect how intangible assets actually work—it's a market that has the potential to unlock enormous value for innovative companies everywhere.

INTA 2026 NYC Conference

Join INTA's upcoming session Lending Against IP: Legal, Financial, and Strategic Considerations at the Business of M&A: Navigating the Convergence of Intangible Assets and Capital in the Age of AI. The session is moderated by Eva Toledo, Partner, Co-CEO at Padima. The panel features Alan Kravetz, CEO at Full Sail IP Partners, Lally Rementilla, Lead Partner at IP Investment Partners, and Gowling WLG Partner Jayde Wood.

Read the original article on GowlingWLG.com