Government’s Future Fund FAQs
Last updated 16:30pm, 1 July 2020
Business start-ups across the UK facing uncertain economic times due to Coronavirus (or COVID-19) have welcomed the Government’s announcement of a new £250 million ‘Future Fund’.
This scheme is designed to help emerging businesses with convertible loans of between £125,000 to £5 million.
Applications for the Future Fund are now open and are being dealt with on a first come first served basis. Below we summarise the key terms of the government’s convertible loan scheme.
Who is eligible for the fund?
To be eligible for the Future Fund, a business must:
- Be a private company registered in the UK;
- Have a ‘substantive economic presence’ in the UK; and
- Have raised at least £250,000 (in aggregate) from private third party investors in previous funding rounds within the past 5 years.
What will the fund offer?
The fund will provide businesses with unsecured convertible bridge loans from the Government. The loan must be:
- A minimum of £125,000;
- A maximum of £5 million; and
- No more than 50% of the total bridge funding received by the business.
The remaining amount of convertible bridge loan funding must be sought from private sector loans, with businesses able to borrow over 50% of the funding from private investors as no cap will be placed on these under the scheme.
How can the loan be used?
Eligible businesses who receive a bridging loan under the fund are restricted in how they can use the loan and must apply this for working capital purposes only.
This means the Future Fund cannot be relied on for borrowing repayments, any dividend or bonus payments, or any fees owed to external advisors in respect of the Government loan.
Businesses must continue to source funds for these purposes from elsewhere.
How long will the loan last for?
Future Fund loans are provided for a term of 36 months.
When the loan hits maturity, the loan shall at the lenders’ option either (i) be repaid by the company together with interest and a 100% redemption premium; or (ii) convert into equity at a discount of at least 20% to the price set by the most recent funding round.
What interest will be charged?
Loans provided by the fund will be subject to a non-compounding interest rate of 8% per annum.
Businesses should note that if they agree a higher rate of interest for loans provided by a private investor, the higher rate will also apply to their government loan.
How will the loan convert?
If during the loan term the business carries out a qualifying funding round, the loan will convert into equity at a discount of at least 20% (Discount Rate).
A “qualifying” funding round is where the business raises equity capital equal to at least the aggregate amount of the bridge funding, excluding shares issued to employees or consultants on exercise of any options or shares issued on conversion of the bridge funding. Funding rounds will be “non-qualifying” if less than this amount of equity capital is raised in the funding round.
On a “non-qualifying” funding round, at the election of the holders of a majority of the principal amount held by the matched investors, the bridge funding shall convert into equity at the Discount Rate to the price set by that funding round.
On a sale or IPO, the loan shall either convert into equity at the Discount Rate to the price set by the most recent “non-qualifying” funding round or it shall be repaid with a redemption premium (being a premium equal to 100% of the principal of the bridge funding), whichever will provide the higher amount for the lenders.
Are the fund terms negotiable?
The following commercial issues are negotiable:
- the interest rate which must be at least 8%;
- the conversion discount rate which must be at least 20%;
- any headroom for investments on the same terms which may be made within 90 days of the convertible loan funding but such amounts will not be matched; and
- any valuation cap on conversion.
The terms of the convertible loan agreement are set out in the documents on the British Business Bank website.
What other important features should businesses be aware of?
- The business will be required to provide limited warranties and covenants to the Government, including an undertaking to treat lenders and holders of the conversion equity fairly and equally and not creating any indebtedness senior to the loan other than indebtedness from a third party lender that is not an existing shareholders or investor.
- Where further convertible loans are agreed with investors on more favourable terms, those terms will be applied to the bridge funding loans under this scheme.
- The Government will be entitled to transfer the loan, and any shares following conversion of the loan, free from restrictions to any institutional investors who are acquiring a portfolio containing a minimum of ten Future Fund investments. Transfers of shares can also take place without restriction within the government.
When can funding be applied for?
The Future Fund scheme is open for applications until September 2020, with the scheme delivered in partnership with the British Business Bank. For more details on the application process, which must be initiated by the lead co-investor and completed by the company, please see the British Business Bank website.
Although an initial amount of £250million was made available to start-ups under the Fund, £320 million of funding has been provided by the government so far with more expected before the end of September.
On 30 June 2020 the government expanded the eligibility to UK companies that have participated in highly selective accelerator programmes and were required, as part of that programme, to have parent companies outside of the UK.
If you would like to talk through the consequences for your business, please email us and one of our team will get in touch.
The content of this page is a summary of the law in force at the date of publication and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.
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