Future Fund conversions

England and Wales

Data released by the British Business Bank show that the Future Fund provided a total of £1.14 billion worth of Convertible Loan Agreements (“CLAs”) to 1,190 companies who completed their applications to the Future Fund since the scheme was launched in May 2020. Given that the duration of a CLA is three years and the first applications were made to the Future Fund over 18 months ago, we are starting to see a number of loans made under a CLA convert into equity. This article highlights some of the key things that a company will need to consider on conversion of a CLA.

Conversion Events

A CLA will convert in the following circumstances:

  1. automatically, if the Company undertakes an equity financing round in which the Company raises an amount equal to at least the aggregate principal amount of the loans made under the CLA;

  2. at the election of the holders of more than 50% of the total amount of the loans (excluding the Future Fund) (the “Lender Majority”) if the Company undertakes an equity financing round in which the Company raises an amount that is less than the aggregate principal amount of the loans made under the CLA but more than 25% of the aggregate amount of such loans.

  3. at the election of the Lender Majority and the Future Fund, if the Company raises an amount equal to or less than 25% of the aggregate principal amount of the loans made under the CLA;

  4. automatically, on (i) the sale of more than 50% of the shares in the capital of the company or (ii) an IPO or (iii) the sale of all or substantially all of the Company’s undertakings and assets (an “Exit”), if the Future Fund or a matched investor would receive a greater amount of consideration on conversion of their loans on an Exit than they would otherwise receive had their loans been repaid plus a premium equal to 100% of the principal amount of the loan (the “Redemption Premium”); and

  5. automatically, on the maturity date prescribed in the CLA (unless the Future Fund or the Lender Majority elect for the Company to repay their respective loans plus a Redemption Premium).

Timing and notification

  • A company is required to give the Future Fund at least 20 business days’ notice before the proposed completion date of a conversion event.

  • Given the volume of CLA conversions that the Future Fund is currently processing, it is important for companies to set a completion date which gives the Future Fund enough time to review the relevant transaction documents. Too short a time period could lead to a delay in completion.

  • Delaying the completion date is problematic because the calculation of the amount of shares to be issued on conversion of the CLA will need to be amended in the transaction documents as the interest accrues from the date of the CLA until the completion date of the conversion event.

  • If the completion date is postponed, the Future Fund has been willing to accept payment in cash of any additional interest. However, the other matched investor(s) would also need to confirm that they are happy to accept payment in cash of any additional interest. This is fine if there are a small amount of matched investors but will create practical difficulties if there are lots of matched investors.

  • There are no notification obligations if the company is converting a pre-existing debt or pre-existing convertible instrument into equity.


If the conversion event is an equity financing, the Future Fund will want to review the following documents:

  • Subscription Agreement;

  • Shareholders’ Agreement;

  • New articles of association of the Company;

  • Board and shareholder approvals;

  • Form SH01 (for filing at Companies House); and

  • An updated cap table.

The Future Fund will also only sign the documents that it is a party to via DocuSign.

Key provisions in the equity financing documentation

The Future Fund requires the following provisions from the CLA to be incorporated into the relevant transaction documents:

  • a conflicts provision such that the terms of the CLA shall prevail over the terms of the shareholders’ / subscription agreement if there is any conflict between the terms of the two agreements;

  • the Future Fund’s information rights under the CLA and any shareholder governance rights from the CLA (e.g. the right to appoint an observer to attend board meetings);

  • the same warranties given by the company under the CLA as well as warranties regarding the company’s compliance with the CLA and its authority and capacity to enter into the subscription agreement;

  • a warranty that the conversion shares to be issued to the Future Fund are the most senior class of shares with identical rights and preferences attached to the shares to be issued to the investor(s) in the equity financing; and

  • a provision which permits the Future Fund to make disclosures about the company to Associated Government Entities (i.e. UK government departments and their subsidiaries, non-departmental public bodies, other public bodies, public corporations and their subsidiary bodies sponsored by UK Government departments) or which the Future Fund deems necessary in order to comply with statutory or parliamentary requirements.

The Future Fund will not accept being subject to any restrictive covenants.

Given that there is some negotiation required with the Future Fund to incorporate some of the terms of the CLA into the transaction documents, the lawyers acting for the company on the equity financing can support the company in its negotiations with the Future Fund.