Things to consider with the Future Fund application.
There are two significant factors that you will need to be comfortable with if you are you apply for the Future Fund.
The first is that at the end of the 36 months, the Future Fund has the right to request that the loan and any unpaid interest is repaid, together with the redemption premium which, as per the terms of the agreement, is 100% of the loan. For example, if £125,000 is borrowed, excluding any interest due, the redemption premium will total a further £125,000, meaning £250,000 will need to be repaid in total.
The second is that if the Future Fund as a lender decides not to execute the repayment with redemption premium, they can instead choose to enjoy a minimum 20% conversion discount on the lowest price paid for the most senior share type. This means that when the loan converts, the Future Fund is entitled to however many senior shares the original amount lended can buy at 80% of the lowest price paid for the shares.
The second consideration may seem punitive, but a conversion discount is quite common in seed funding as it promises a greater return to investors for taking an initial risk. Indeed, it might be better to offer equity if the business is still growing and strapped for cash that it can’t afford to repay at two times the rate it borrowed. Note, however, that the conversion price is set at 80% of the lowest price paid for senior share types.
Businesses should be mindful that a mandatory term is that any equity converted is eligible to be passed on from the Future Fund to its (potentially multiple) investors. Most standard shareholder agreements don’t include articles that allow for the transfer of equity, so you’d need to be confident getting a majority of shareholders to agree to this if you are not a sole investor.
And lastly, due to the high redemption premium you should consider whether your business is going to be in a good enough position 3 years from now to repay a significant sum or, failing that, be comfortable with the Future Fund holding a significant share of the business.