On Monday 20 April 2020 the Chancellor of the Exchequer announced the UK government’s plan to support high-growth innovative businesses in the UK. We set out below some of the key details of the scheme and some thoughts on whether the Future Fund could be right for your business.
What is the Future Fund?
The purpose of the fund is to provide support to those businesses, primarily in the technology and life sciences sectors, which until now have not been eligible for support under either the CBIL or CLBIL schemes because they are either pre-revenue or pre-profit and typically rely on equity investment.
The government has partnered with the British Business bank and committed £250 million to these businesses who are facing serious difficulties as a result of the current pandemic.
This new co-investment scheme, which will be available from 1 May, will see the Future Fund provide unsecured convertible loans ranging from £125,000 to £5 million.
The scheme will be open to applications until the end of September but this may be extended.
Is your Business Eligible?
In order to qualify for access to the Future Fund the applicant business must:
- be an unlisted UK registered company with a substantive economic presence in the UK. In the case of group companies this will apply to the parent company only, so companies with a non-UK parent company will not be eligible;
- have previously raised at least £250,000 in equity investment from third party investors in the last 5 years. There is no restriction on sums raised on previous rounds which means that the scheme will be available to those pre-Series A businesses who have previously raised investment from angel or family and friends rounds as well as more established, later stage businesses; and
- be able to attract at least matching funding from third party private investors or institutions. Importantly at this stage, there are no restrictions blocking access to funding if the business is in distress or has a limited runway or a requirement to provide a revised business plan.
NB: full eligibility criteria have not yet been published and it is possible that future applications may include more formal requirements and/or limitations.
Eligible businesses will be provided with convertible loans which will be subject to the following headline terms:
Purpose: the loan must be used for working capital purposes only. It may not be used to pay dividends, repay external debt, make any bonus payments to staff/management/shareholders/consultants or used to pay fees or bonuses to external advisers assisting with the government funding.
Interest rate: interest will accrue at a minimum rate of 8% per annum on a non-compounding basis unless a higher rate is agreed with the matching investors.
Term: the term of the loan will be a maximum of 3 years from the date of borrowing.
Conversion: the loan will automatically convert into the most senior class of shares in issue or issued in any more senior financing round in the following six months on a qualifying funding round (investment equal to the loan) at a 20% discount rate. There will also be optional conversion rights on a non-qualifying funding round.
Repayment: The expectation is that the loan will convert into shares prior to maturity. However, on expiry of the term the Future Fund and matching investors may elect for the loan to be repaid, in which case the amount repaid will be double the original loan.
Governance and other rights: The Future Fund will have limited corporate governance rights, information rights and investor protections during the term of the loan and as a shareholder following conversion will be entitled to standard minority shareholder protections. Businesses need to be aware that the Future Fund will be able to transfer a portfolio of its loans/shares to other government departments/wholly owned entities or institutional investors.
As with any new initiative, there are a few issues. For instance, the requirement that the matching investment must also be made by convertible loan means that the investor(s) will not qualify for SEIS/EIS relief on their investment. This will clearly have a significant impact on some investors’ willingness to participate.
There has also been criticism that many new businesses with great potential will still be not be in a position to take advantage of this initiative either because they have not met the previous investment requirement or are unable to obtain the required matching investment.
This scheme is fundamentally intended to provide support to certain existing businesses with a proven track record of initial investment and growth. It is not intended to fund the majority of new start-ups and it is important for the UK government to find the balance between nurturing growth for promising early stage businesses and speculating on high-risk investments with tax payers’ money.
Finally, it is important that any business thinking of applying gives serious consideration to the long term implications of a successful application and the level of control of their business they will be handing over.