The Future Fund

Updated as of 28 April 2020

What is it?

The Government has announced that it will lend up to an initial amount of £250 million as unsecured convertible bridge funding to UK-based companies. This Future Fund will be made available in partnership with the British Business Bank (the government owned business development bank dedicated to smaller businesses).

The Government has only released the headline terms of this scheme so far whilst they work on the finer details and we will update this page as and when further details are known.

When will the funds be made available?

They intend to open applications for the scheme in May with the scale of the fund kept under review.

Who will be eligible for a loan?

Guidance published so far has made clear that the new scheme is intended to provide cash to those businesses which have been unable to access other government covid-19 support programmes such as the CBILS – so those start-ups that are pre-revenue or pre-profit and would usually rely on equity investment.

Full details of the eligibility criteria are yet to be published but minimum requirements so far are that the applicant must:

  • be a UK-registered unlisted company operating a business with a substantive economic presence in the UK
  • have previously raised at least £250,000 in aggregate from private third party investor in previous funding rounds in the last five years.
  • Be able to secure an equal or greater amount of matched funding from other private third party investors at the same time (Matched Investors).

Any applicant will also be subject to customary KYC, money laundering and customer fraud checks before being accepted.

How much can a company borrow?

The government will provide loans of between £125,000 and £5,000,000. The amount the company may accept from the Matched Investors will not be capped and so there is no cap on the aggregate bridge funding being provided.

What can a Future Fund loan be used for?

It must be used solely for working capital purposes and cannot be used to repay any borrowings, pay any dividends or bonus payments to staff, management, shareholders or consultants or, in respect of the Government loan, advisory or placement fees or bonuses to external advisers.

When will the loan convert?

  • On a “qualifying funding round” (this is when the amount raised, excluding any shares issued on conversion of the bridge funding or to employees/consultants on exercise of any options, is at least equal to the total bridge funding):  the principal amount of the Government loan will automatically convert into equity at a minimum conversion discount of 20% (Discount Rate) to the price set by that funding round. The Discount Rate will be higher if a higher rate is agreed between the company and the Matched Investors. Accrued interest will be repaid rather than converted.
  • On a “non-qualifying funding round” (this is when less is raised than the amount required for a “qualifying funding round”): at the election of a majority (by amount held) of the Matched Investors, the Government loan will convert into equity at the Discount Rate to the price set by that funding round. .
  • On a sale or IPO: if not previously repaid or converted, the Government loan will either convert into equity at the Discount Rate to the price set by the most recent non-qualifying funding round or it will be repaid with a redemption premium (being a premium equal to 100% of the principal of the bridge funding), whichever provides the higher amount for the lenders.
  • On maturity of the loan: the Government loan will, at the option of a majority of the Matched Investors (i) be repaid by the company with the redemption premium or (ii) convert into equity at the Discount Rate to the price set by the most recent funding round. It seems (although some clarity is needed on this) that the Government wants the loans to automatically convert unless it specifically requests repayment (allowing the Government to participate in the growth of those companies).

What happens on conversion?

On a conversion event, the loan shall convert into the most senior class of shares in the company. If a further funding round is completed within six months of the relevant conversion event, the lenders shall be entitled to convert their shares into the senior class of shares of the company in issue post that round.

What terms should attach to the funding from the Matched Investors to ensure the application for funds is successful?

Further guidance is needed to clarify this. If the Matched Investors were required to hold the same form of convertible loans as the Government then this may prevent the Matched Investors’ funding being eligible for EIS relief (as this is not available if invested by way of a convertible loan).

It is also unclear (i) whether the funding provided by the Matched Investors must be made simultaneously with that provided by the Government and (ii) who can be a Matched Investor and whether for example funding from the founders or management would be included.

Is interest payable on the loan?

The amount lent by the Government will be subject to a minimum interest rate of 8% per annum (non-compounding) to be paid on maturity of the loan (the Government is entitled to a higher interest rate if a higher rate is agreed between the company and the Matched Investors).

What protections and other key terms will the Government require in order to make a loan?

The Government does not expect to have excessive corporate governance rights during the term of the loan and as a shareholder following conversion of the loan. 

However, the company will be expected:

  • to provide a range of warranties in respect of title and ownership, capacity, compliance with the eligibility criteria, compliance with law, its borrowing, litigation and insolvency events;
  • to give limited covenants for the duration of the term of the loan and following conversion of the loan into equity, including undertaking to treat the lenders / equity holders fairly and equally and to provide the same information rights to them as those enjoyed by other investors in the company; and
  • if in the future it issues further convertible loan instruments to investors on more favourable terms, to allow those terms to also apply to the Government bridge funding (this is referred to as “most favoured nation” in the guidance issued to date).  

The company will not be allowed to create any indebtedness that is senior to the loan other than any bona fide senior indebtedness from a person that is not an existing shareholder or matched investor. This should allow a company to obtain external bank debt and although the guidance is silent on this point, we would hope that granting security for such debt would be permitted.

The Government is entitled to transfer the loan and following conversion of the loan, any of its shares without restriction to an institutional investor which is acquiring a portfolio of the Government’s interest in at least ten companies owned in respect of the Future Fund (meaning that a company ay lose some control over its shareholder base). In addition, the Government shall be entitled to transfer any of its shares without restriction within Government and to entities wholly owned by central government departments.

 

For further guidance on applying for a Future Fund loan or other access to finance support, please email Craig.Bowers@crippspg.co.uk or call 01892 489 581.