The Future Fund matches Funding for Start-ups

The government announced financial support for start-ups totalling around £1.25bn. The package consists of two separate pots of money. The first, which launches in May and is named the Future Fund, is a £500m co-investment fund that will match private investments in high-growth UK companies with state-backed convertible loan notes, which will be administered by the British Business Bank.

The government is initially committing £250m to this scheme, which will be kept under review. The second pot of £750m will provide grants and loans to SMEs that focus on research and development.

Eligibility for the Future Fund

To be eligible for the Future Fund, a company must:

• be an unlisted UK registered company;
• have previously raised at least £250,000 in equity investment from third party investors in the last 5 years;
• have a substantive economic presence in the UK; and
• attract the equivalent matched funding from third party private investors and institutions.

Headline terms of the Future Fund

Below is a summary of the terms of the Future Fund. More detail can be found here - Future Fund

• Loan size – the minimum amount of the loan provided by the Government to the company shall be £125,000, and the maximum amount shall be £5,000,000.
• Term - the term of the loan shall be for a maximum of 36 months.
• Interest rate - minimum of 8% per annum (non-compounding) interest to be paid on maturity of the loan or a higher rate if agreed between the company and the matched investors.
• Conversion

• the loan will convert into equity on the company’s next qualifying round at a minimum conversion discount of 20% (the “Discount Rate”) to the price set by that funding round (with the interest being repaid). If a higher discount rate is agreed between the company and the matched investors, the bridge funding will convert at that higher discount rate; and

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

• Valuation cap – there will be no set valuation cap. Where the matched investors have agreed a valuation cap with the company, the Government shall be entitled to those same terms.

• Maturity – on maturity of the loan, at the option of the holders of a majority of the principal amount held by the matched investors, the company shall:

• repay an amount equal to 2x the principal amount of the loan, with accrued interest added on top; or

• convert the loan into equity at the Discount Rate to the price set by the company’s most recent funding round,

However, the Government can request repayment of its loan if it so chooses.

• Corporate Governance - the Government shall have limited corporate governance rights during the loan term and as a shareholder post-conversion.

• Transfer rights – the Government can transfer the loan (and any shares it holds after conversion) without restriction to an investor acquiring a portfolio of the Government’s investments.

• Most favoured nation - if the company issues further convertible loan instruments to any investors with more favourable terms, those terms shall apply to the Government’s loan.

• Negative Pledge – the company cannot receive any further debt from an existing shareholder/matched investor which ranks ahead of the Government’s loan.

Areas where clarity is sought:

We understand that further details about the Future Fund will be published by the Government in due course – hopefully such guidance will cover off the following points:

• Whether the matched investors must be institutional investors (i.e. venture capital funds), or whether angel investors qualify?
• Whether the matched investors also need to be investing money via a convertible loan note – for instance, can they invest via an advance subscription agreement (and therefore making their investment qualify for EIS)?
• The criteria of what constitutes having a “substantive economic presence in the UK”?
• Details of the logistics of applying for monies from the fund: i.e. to what extent will the government be involved in the transaction process/when will they transfer their money, etc?

Please do get in touch with your contact at CMS should you wish to discuss the Future Fund further.