Leumi Cashes in Its Brain-power Collateral

Banks in recent years have been extending credit to start-up companies against a new form of collateral - a mortgage on the company's intellectual property.

Many of these firms did not own assets like buildings, machinery, or even cars (usually leased), so all that was left of value as security was the company's "brain power" - intellectual property. This could be a patent, software, or even a working bit of hardware from research and development. Up to now, these collateral transactions have never been put to the test, but the crash of many start-ups is forcing the banks to look into realizing intellectual properties.

Last week, Bank Leumi's financing unit for start-up companies took a first step in this field by realizing the intellectual property of Zebra Software. Zebra had borrowed $350,000 from Leumi by mortgaging the company assets and options.

Zebra had developed software for subscribers to download news from Internet newspapers and create their own virtual newspaper to personal specifications. Early last year Zebra failed to raise enough working capital and was forced to dismiss its employees and suspend operations. The bank found itself with a problem - left with worthless options and a mortgage on the software Zebra developed. In fact Zebra shareholders, including Harry Fox (an owner of Versaware), helped the bank sell the asset.

They put Leumi in touch with one of Zebra's biggest customers in South Korea, and after an extended round of negotiations, the software was sold to the Korean firm NIT for $400,000. NIT plans to transfer Zebra's idea from the Internet to Palm, and use the software as a platform for creating a virtual newspaper for Palm Pilot.

The head of the start-up financing unit at Leumi, Shaul Schneider, said that without the cooperation of the company owners, it would have been impossible to find a buyer for the software.

"I'm not a technology expert, and without the cooperation of the owners, the bank would have been in a very tough spot. True, everyone has their match, but it is hard for me to believe banks will manage to realize intellectual property in many instances." In recent years, Israeli banks have helped finance about 100 start-up companies in a format that combines mortgaging of company assets and options.

So far, banks have managed to cash in some returns on their enterprises (mainly Bank Hapoalim) but also some write-offs. It is likely the continuing crisis in the sector will increase the number of write-offs in months to come. This will underpin an increasing need to realize intellectual property.