202005.18

Future Fund Explained

What is it?

UK Government support in the form of loans between £125,000 and £5,000,000.

Who qualifies?

Fast-growing, privately-owned, UK registered companies.

What qualifies as ‘fast-growing’? 

The company must have raised at least £250,000 in equity investment from third party investors in the last five years.

When is it available?

Scheme due to launch in May 2020 and be available until at least the end of September 2020.

What determines the size of loan?

The UK Government will make funds available so long as third party investors (“Matched Investors”) match the funds.

What are the terms of the loan?

The investment will be in the form of convertible loan notes (“Notes”), which will mature after 3 years.

Upon the company’s next qualifying funding found, the principal amount will be converted into equity at a 20% discount to the price set by that funding round.

If not converted by third anniversary, it will either (at the option of the Matched Investors) be repayable with 100% premium or converted at 20% discount to the last round similar provisions apply on a sale or IPO prior to maturity or conversion.

Funds are to be used for working capital purposes only.

Amongst other things, the UK Government ask for a minimum of 8% per annum (non-compounding) interest to be paid on maturity of the loan, the inclusion of a ‘most favoured nation clause’ and the same rights to information as other investors in the company.

If other investors are offered more favourable terms than those outlined above, the Government’s loan will be on the same more favourable terms.

More detail on the published headline terms can be found here.

Other considerations:

Companies must ensure existing funding arrangements with current investors are considered before applying for the loans.  And companies could also use this as an opportunity to amend constitutional documents with emergency / crisis provisions for the future.

Initial thoughts.

The scheme provides significant support to start-up companies, that other countries (such as the US) are yet to offer.

When further guidance is published, companies will need to consider early repayment details as current options include conversion on favourable terms or repaying double the amount plus accrued interest.

Although it is mainly aimed at technology companies, it will be interesting to see which companies in other sectors / industries apply for loans, considering many shareholders will be reluctant to invest now with such uncertainty ahead.

But, by choosing a familiar and understood instrument that qualifying companies, investors and solicitors are used to in practice, the UK Government hopes to have created an efficient, comfortable funding process to help bridge troubled waters.

About that Author:

Henry Wright
Solicitor
020 7421 9421