The founder’s guide to negative pledges and protecting intellectual property

As your company grows, you’ll likely weigh different ways to fund it. Equity is one option. If you want to extend runway, finance a specific initiative, or secure bridge rounds, venture debt may be worth considering.

When founders look at venture debt or other startup loans, they often focus on the main terms: how much money they’ll get, the interest rate, and the repayment schedule. But other parts of the agreement are just as important — including the negative pledge. But, you might be wondering, “What is a negative pledge?”

A negative pledge is a promise to the lender about how certain company assets can be used in the future, which typically means that those assets can’t be pledged as collateral for another loan, unless the original lender receives the same protection. This is especially important when the clause covers intellectual property (IP), since, for many startups, assets like software, patents, and proprietary technology represent the core value of the business.

In this guide, you’ll learn how negative pledges work — especially when intellectual property is involved — so you’ll know what to look for before signing a debt agreement.

Lenders view loans as risk. Negative pledge clauses help manage that risk, without requiring full control over a company’s assets.

Venture debt lenders often rely on company assets as collateral, which means they can use those assets to recover the loan, if the company doesn’t repay their loan. The lender may also set rules about how the assets can be used in future borrowing. A negative pledge makes sure the business doesn’t use the same assets to secure another loan later. This gives the lender confidence that their position won’t be weakened if the company borrows more money.

Once a negative pledge is in place, it can influence more than just your current loan. It may also affect how easily your business can raise additional financing in the future.

For example, imagine your company wants equipment financing to purchase servers or specialized equipment. These loans typically use the equipment itself as collateral. If an existing agreement restricts you from using company assets for new secured loans, the equipment lender may require approval from your current lender first. In this case, future financing is still possible, but it may require additional approvals or coordination between lenders.

You’ll usually find negative pledge agreements in the loan agreement for venture debt or other startup loans. They’re often in the section that explains what the company can and can’t do while the loan is still active.

Because these clauses aren’t headline terms, founders sometimes miss them when reviewing agreements. But it's worth reading loan documents carefully, since even a short section about asset restrictions can affect whether you’ll be able to take on additional financing later.

For many startups, the most valuable assets aren’t physical — they’re the intangible assets that the company has created. Things like patents, proprietary technology and software, data, and other intellectual property (IP) often represent a business’s core value.

When there’s a negative pledge on IP, this can significantly impact your startup. IP is often a key asset lenders consider when evaluating venture debt. If it can’t be used as collateral, it may limit certain financing options later.

Some loan agreements add an additional layer of these restrictions, called a double negative pledge. With a double negative pledge, the restriction on future financing doesn’t only apply to the borrowing company; it can also extend to related entities, such as subsidiaries or holding companies. The goal here is similar to a standard negative pledge: Lenders want assurance that key assets won’t be used to support other debt without their involvement.

If your startup’s intellectual property sits in a separate entity, it’s important to understand that agreeing to a double negative clause can impact that entity, too, and prevent them from pledging the same assets as collateral for another loan. 

How does a double negative pledge on intellectual property work?

Some startups place their IP in a separate entity (often an IP holding company), while the operating company runs the business and uses the technology. Unless the loan agreement contains specific restrictions, the holding company could pledge the IP to another lender.

A double negative pledge prevents this workaround by extending the restriction to related entities. So, when this clause is in place, startups can’t move assets between affiliated companies to bypass lender’s terms.

Sometimes founders don’t consider the implications of negative pledge clauses until they need to make a change, like securing a new loan, opening a new line of credit, or restructuring your company. And then they feel the impact.

Securing a new loan

Say you already have one loan, and you want to secure a second loan to  invest in new machinery. If your current loan limits new borrowing that’s backed by business assets, the lender for the new machinery loan may need to wait until your original lender approves the deal.

Opening a line of credit

You might also face issues when opening a line of credit. A bank may check your existing loan agreements to make sure the new credit line doesn’t conflict with earlier loan terms. If there’s a conflict, they probably won’t approve your application.

Company restructuring

If your company makes structural changes, like creating a subsidiary or moving intellectual property into a separate entity, your lender may need to approve the IP transfer before it happens.

When reviewing loan documents, look out for these red flags: 

• Language that covers nearly all business assets: Sometimes described as “all present and future assets,” this language includes intellectual property. Such broad clauses can make it harder to secure additional financing later.
• Restrictions that also apply to subsidiaries or related companies: This is important if your startup keeps intellectual property in a separate entity, like an IP holding company.
• Clauses requiring lender approval on future loans: Look out for clauses that require lender approval before taking on new secured debt, such as loans backed by your company’s assets. These requirements can slow down future financing or even routine credit arrangements.

Once you understand the potential risks of a negative pledge, the next step is deciding what parts of the clause can be negotiated. A good starting point is the scope of assets covered. Some agreements include nearly all business assets, and others focus only on specific assets tied to the loan. Founders can also ask for carve-outs, which are exceptions that let you borrow for specific reasons.

It’s also worth checking whether the negative pledge restriction applies to subsidiaries or IP holding companies. More specific language can give you more flexibility as your business grows.

Carve-outs are legal exceptions to a negative pledge that let founders get certain types of financing without needing approval from the original lender. These can significantly improve a company’s flexibility after signing a loan agreement.

Common carve-outs include:

• Equipment financing
• Capital leases for hardware or machinery
• Trade credit from suppliers

Some carve-out agreements will also let you borrow up to a certain amount without extra approval.

These exceptions are important because startups often add smaller financing tools as they grow. Without carve-outs, even routine borrowing might need approval from your current lender.

Raising money through priced equity rounds doesn’t involve using company assets as collateral. Neither do Simple Agreements for Future Equity (SAFEs), which are investment agreements that turn into equity in a future funding round. So, these deals typically don’t conflict with a negative pledge and therefore don’t don’t affect equity financing. 

Investors may still review your existing debt terms when evaluating your company for potential funding . If they see broad restrictions on business assets, they might ask how those terms could affect future financing options.

Negative pledge clauses exist to protect lenders, but they shouldn’t prevent you from running your business.

Lenders want confidence that key assets won’t be pledged to another lender. Founders, meanwhile, need the flexibility to raise capital, add new financing tools, or restructure parts of their business as it grows.

When negotiating, completely removing the clause entirely usually isn’t necessary. The goal is to make sure it protects the lender without limiting your normal business operations.

Before signing a loan agreement with a negative pledge, ask your lawyer a few practical questions:

• What assets does this clause actually cover? Does it apply to all company assets or only specific ones tied to the loan?
• What financing is still allowed without lender approval? (For example, does it cover equipment financing, credit lines, or other small borrowing?)
• Does the restriction apply to subsidiaries or IP holding companies?
• If our company takes on another loan later, what approvals would be required?
• Are there carve-outs or dollar thresholds that protect routine financing?

Clear answers to these questions can help you understand how restrictive the clause really is.

Negative pledge clauses are common in venture debt agreements, but the details can affect how much flexibility your business has later. Understanding what the clause covers — especially if it involves intellectual property — will help startup founders avoid surprises as the company grows.