The Future Fund is a new lifeline for innovative businesses struggling with cash flow. But who qualifies, what are the terms, and who should apply to it?
On 20 May the government opened the £250 million Future Fund to applications. This new facility provides government-backed loans worth between £125,000 and £5 million to innovative businesses, so long as the money is at least matched by private investors.
Applications to the Future Fund must be made through the official portal: UK-futurefund.co.uk. The scheme is delivered by the British Business Bank and will close at the end of September.
The fund was created specifically to support startups and scaleups, many of which are finding existing schemes – like the CBILS the Coronavirus Job Retention Scheme – unsuitable. By offering targeted support, the Future Fund will help pre-profit innovators cover their costs while sandbagging British innovation from the damage of the lockdown.
Importantly, this is not a no-strings-attached grant or relief. Future Fund support comes in the form of a convertible loan note which translates into equity during the company’s next fundraise or exit.
The terms of the Convertible Loan Agreement have minimum requirements set by the government. However there are four areas which can be negotiated with private lenders, impacting how generous the scheme is to benefiting companies. The areas are:
- The conversion discount rate (at least 20%)
- The loan interest rate (at least 8%)
- An optional valuation cap on conversion, set by private investors
- Headroom on investments made within 90 days of the Future Fund note (although these amounts won’t be matched by the Future Fund)
We will look at who is eligible for Future Fund support and how these convertible loan notes are structured.
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Who is eligible for the Future Fund?
The scheme is open to businesses which:
- Are based in the UK
- For whom at least one of the following is true:
- half or more of their employees are UK-based
- half or more revenues are from UK sales
- Were incorporated on or before 31 December 2019
- Have raised at least £250,000 in equity investment between 1 April 2015 – 19th April 2020
- The shares must have been issued for cash, and to third-party external investors, not founders, employees, consultants or other connected parties
- Can attract funding from private investors which at least matches the value of the loan from the government
Where companies that are part of a group, only the parent company can apply.
Update: 29 June 2020
According to the Financial Times, the Future Fund will soon be expanded to include companies which have moved their headquarters to the US to attract investors or enter into an accelerator programme.
Investors may only participate in matched funding if they meet the usual regulations for investing in UK businesses. Despite initial concerns, money from EIS investors and Venture Capital Trusts will be matched, however investors will not receive relief on their Future Fund investments.
What Are the Terms the CLA?
The terms of the CLA have changed very little since the government announced the scheme in April. You can read the full terms in the Convertible Loan Agreement, and our analysis of the key points is below.
Bear in mind these are the government’s initial terms. They may change depending on negotiations with investors.
- Term: The loan will mature after a maximum of 36 months. This is significantly longer than other convertible loan notes. The government has set such a lengthy window to increase the chances that benefitting companies will take on new funding or achieve an exit, allowing market forces to value the company and therefore the government’s shareholding.
- Interest: The government’s loan will accrue a minimum of 8% interest per year. If you agree a higher interest rate with your private lenders – and the chances are you will – the government will receive the same rate.
- Use of proceeds: The loan must only be used to cover working capital costs. It can’t be used to repay borrowings, pay bonuses or dividends, or any advisory or placement fees or bonuses to external advisers.
- Equity Conversion: Whatever is left of the loan will automatically convert into equity during your next ‘qualifying’ funding round. It will convert at a minimum discount – the ‘Discount Rate’ – of 20% to the price set in that funding round. The final discount rate will be determined between the company and their private investors.
The government has defined ‘qualifying funding round’ as one where an amount is raised that’s equal or greater in value to the cash you received through the Future Fund scheme.
The government says that during 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”.
If you IPO or sell the company before you’ve repaid the loan it will either convert into equity at the Discount Rate to the price set in your most recent non-qualifying funding round, or you will have to repay it with a ‘redemption premium’, which is 100% of the principal of the bridge funding. The money will be paid back in whatever form provides a higher return for the lenders.
- Share class: The loan will convert into the most senior class of shares in your company
- Decision-making: The government will have limited corporate governance rights during the term of the loan and as a shareholder
Transfer of rights: The government will have the right to transfer the loan and any equity created by the loan to an institutional investor that is acquiring the government’s interest in at least nine other companies generated by the Future Fund
How Do I Apply?
There are five stages to the Future Fund application. Unlike other schemes, it is the private investor or investors which take the lead on compiling the application, not the company itself.
If a single investor is involved, they will be handling the application. If a number of investors are involved, a single ‘Lead Investor’ must be chosen to manage the application.
The lead investor has no further additional responsibilities once the application is finished. They do not have to be UK based, or the largest investor in the round, but they must be contributing at least £12,500 in matched funding.
Stage 1: The investor, or lead investor, certifies they meet the scheme’s eligibility criteria. They also provide complete details of the investment round via the Future Fund portal: UK-futurefund.co.uk
Stage 2: The recipient company then confirms the accuracy of the investment details, before submitting the full application
Stage 3: The British Business Bank will spend ‘a minimum of 21 days’ reviewing the application
Stage 4: If the British Business Bank approves the application then all parties – the investor(s), the government and the company – will execute the Convertible Loan Agreement. They must then satisfy certain conditions set out in the agreement before the funds are released
Stage 5: The investors’ funds must be transferred to the bank account of the company’s solicitor. Once the solicitor confirms the receipt of all funds, the British Business Bank will release the matched funding.
Should My Business Apply?
We now know the full terms of the Convertible Loan Agreement, and they are relatively generous. However, a handful of important terms depend on the agreements companies negotiate with their private investors.
The benefit of the Future Fund hinges entirely on these negotiations.
Companies with strong existing relationships are likely to gain favourable rates and benefit more greatly from the scheme. Those building relationships from scratch are likely to find investment more expensive and harder to come by.
Our Advice: Get Moving
If you are planning to apply, there’s no time to waste. All indications are that Future Fund support will be distributed on a first-come, first-serve basis. And given the 21-day application processing time (which we do expect the British Business Bank to beat) it’s important to move quickly.
Companies which have lined up private backers, and submit a clean and accurate application, will receive their money sooner.
For more information about the Future Fund I recommend reading the FAQs or calling the Future Fund helpline on 03307260230
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