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Software is a relatively new type of business asset, but already has taken on a central role in all sectors of the economy; when any asset brings such a crucial value to businesses, the desire for lending based on that asset cannot be far behind. Unfortunately, the existing academic literature contains no sustained examination of software-related lending.

Because the software industry is in its infancy, the existing empirical evidence is inadequate to support any understanding of it. Accordingly, I undertook a series of twenty-nine informal interviews with industry participants, including lenders in both the Massachusetts Route 128 corridor and Silicon Valley, software companies that borrow money to develop software, and large software companies that must accommodate their customers' need for funds to facilitate the acquisition of software.

This Article presents the results of those interviews. Although the relevant legal rules are relatively inhospitable to such lending, the interviews reveal a thriving industry that provides substantial debt investment in the two primary areas in which software is particularly valuable to a business: start-up businesses developing software and established businesses acquiring software.

The Article proceeds in three steps. Part I sets the stage by explaining the practical circumstances and background legal rules that make it improbable that lenders rely on liquidation of collateral as an exit strategy for an unsuccessful software lending transaction. As the discussion shows, those problems are more complex and intractable than they might appear at first glance.

Because those problems provide an almost absolute bar on a lender's ability to liquidate collateral, they provide a perfect environment in which to test theories about the basic motivations for businesses to engage in asset-based lending. In particular, the existence of a substantial amount of asset-based lending on software flies in the face of the conventional notion that lenders want to use secured lending because of the right of liquidation that they get in a secured transaction. Conversely, the existence of that lending provides strong support for the developing scholarship that less direct effects on the borrower's activity and incentives before the point of default actually motivate parties to use secured lending.


Banking and Finance Law | Intellectual Property Law | Law