Future Fund Will Provide Convertible Loans To UK Companies

Today, as part of its £1.25bn bail-out plan to help mitigate the economic ramifications of the coronavirus pandemic, the UK Government announced the £250m “Future Fund”.  Launching in May 2020 in partnership with the British Business Bank (initially until the end of September 2020), the Future Fund will provide convertible loans to UK companies in amounts ranging from £125,000 to £5million, subject to third party investors matching the amount. The fund aims to support UK startups that rely on equity investment but are unable to access the Coronavirus Business Interruption Loan Scheme. 

In order to be eligible for the scheme your business must:
• be UK based
• be unlisted
• have a substantive economic presence in the UK
• be able to attract the equivalent match funding from third party private investors and institutions
• have raised at least £250,000 in equity investment from third party investors in the past five years.

The loans will take the form of unsecured convertible loan notes whereby the funding provided will automatically convert into equity on the company’s next qualifying funding round, at a minimum discount rate of 20% (though the discount rate will not apply to any interest). A qualifying round will be an equity round which is at least of the amount of the aggregate loan (ie including the amount of the 50% to be provided by the private investors).  The private investors providing that 50% will be able to decide if the loan should convert where the equity funding round is not a qualifying round.  The loan shall convert into the most senior class of shares in the company.  

The loan(s) shall mature after a maximum of 36 months and interest of 8% per annum (or higher if a higher amount is agreed with the private investors) will be paid on maturity of the loan.  On maturity there will be two options available to the qualifying company:

(i) The loan can be repaid by the company with a redemption premium equal to 100% of the amount of the loan; or
(ii) The loan can be converted into equity at a discount rate to the price set by the most recent funding round (the discount rate to be no less than 20%). 

In the majority of cases, this will mean that the government will be taking equity in early-stage businesses (as most companies will likely prefer not to repay the loan at a 100% premium). As Business Insider comments, however, it is unlikely that the government would continue to hold equity through later funding rounds but instead would offer later-stage investors the opportunity to buy out the government’s stake.

One does ask why, though, this only appears to be being offered on a debt basis, as a loan does not currently qualify for EIS relief.  It would be useful for companies if they could receive the match funding by way of an equity investment, which could, for instance, be provided by way of an advanced subscription agreement.  This would give those third party investors (who provide the matching amount) a chance to claim EIS relief, which would be an added incentive, though of course could detract from such investors being part of any qualifying funding round.

Further, and interestingly, the proposed headline terms provided (which can be found here, but are subject to change) state that the government may transfer the loan (or resulting shares) to an institutional investor where that investor is taking on the debt / resulting equity of at least 10 “Future Fund” funded businesses.