What is the Future Fund and how does it work?
The Future Fund is a bridge funding initiative that the British government launched as one of several business support grants to stimulate the post-COVID-19 economy. It’s aimed at turbo-boosting businesses who have previously secured significant seed funding, but doesn’t come without risks.
It’s available to lead and sole investors only with agreement of the investee company, specifically those who have raised over £125,000 in capital for a business between 1 April 2015 and 19 April 2020. The fund aims to match the capital raised on a 1:1 basis up to a maximum of £5 million.
The terms ‘lead or sole investor’ are key as they mean the Future Fund is only available to professional investors and not simply friends and family putting money into a business.
Although only available to investors, the Future Fund will need to demonstrate it’s being used by an eligible company, which must:
- Be a UK limited company that was incorporated on or before 31 December 2019
- Have raised at least £250,000 from private third-party investors in previous equity funding rounds in the last five years between 1 April 2015 to 19 April 2020
- Have a substantive economic presence in the UK, specifically it must:
- Have half or more employees based in the UK
- Have half or more of revenue originating in the UK
- Be the parent company if part of a group
- Not be a listed company on any regulated markets, multilateral trading facilities or recognised investment exchange and/or any other similar market, stock exchange or listing venue
- Be subject to customer fraud, money laundering and “know your customer” checks.
Furthermore, the Future Fund can only be used as working capital. This means it can’t be used to repay any borrowed money, pay dividends or bonuses, or to pay for advisors.
In practicality, due to the eligibility criteria, it’s likely the Future Fund won’t be applicable to businesses that are just starting up. Rather, it’ll be suitable for those who have managed to secure initial funding and have moved to the next stage.
Investors who are successful in their application should note that the Future Fund is a loan and matures in 36 months.
Applications for the fund are open now, and the scheme is currently due to close for applications on 30 September 2020.
Future Fund – an Investment or a Loan?
The Future Fund is very much a loan which is backed by the government but offered by a third party creditor “UK FF Nominees Limited”. As a loan, there will be interest due, as well as a conversion term applicable either on maturation or when one of four trigger conditions are met.
By stating it’s convertible, this means that the loan has an option to be converted into shares rather than it being repaid.
The key points to bear in mind are:
- Interest is non-compounding and is set at a minimum 8% APR but can be higher if both the company and investors agree
- Interest is not payable on a monthly basis. It will accrue until the loan matures or is triggered by one of the conversion criteria
- If the interest cannot be repaid, it will convert to equity
- The loan cannot be repaid early unless all of the investors agree to this