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On 20 April 2020, the Chancellor of the Exchequer, Rishi Sunak announced a new unsecured convertible loan scheme. This convertible loan scheme will be offered to innovative companies that are having financial difficulties because of the coronavirus outbreak. The government have decided to name the loan scheme the Future Fund. The Future Fund has been specially designed to support businesses that trade in life sciences and the technology sector.
The motive behind the scheme was to support businesses that were unable to access other government business support. The coronavirus business interruption loan scheme is not available to some businesses because they are either pre-profit or pre-revenue and rely on equity investment instead.
The funds available total £250 million. This is unlocked by investment from the private sector in a matched funding basis. There may be more funding in the pot at a later date, as the government are committed to supporting these innovative businesses.
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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
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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.
Closing thoughts.
The Future Fund is certainly attractive to investors willing to give away a good deal of equity in return for a quick plug of cash in the wake of the coronavirus outbreak.
If you’re risk averse, don’t anticipate a high cash return in the next 3 years or looking to maintain equity, it’s likely the Future Fund won’t be for you.
However, if your pool of investors has dried up and the growth of your business has been stymied by COVID-19, the Future Fund offers a quick fix – so long as you’re confident you can either get another investor on board before the loan matures, or your margins grow.
How can Britton and Time Solicitors help?
Britton and Time can advise on Future Fund agreements and Future Fund applications, as well as help with facilitating cash transfers in line with government guidance.
To get in contact with us, either send us an email via [email protected] or call our solicitors directly through 020 3007 5500.
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