Future Fund Business Loan Scheme: Convertible Loans

The Government’s Future Fund (the Scheme) which is intended to support UK start-ups opened on 20 May 2020 for applications and is intended to remain open until September 2020.

The Scheme is aimed at companies that have been unable to access other government business support programmes because they are either pre-revenue or pre-profit.

How the Scheme works

UK-based companies that are eligible are provided with between £125k and £5m in government support, with third-party investors needing, as a minimum, to match the government’s commitment. The requirement for third-party investors is absolute and companies will not be eligible for funding if they are unable to get third-party investor funding. There is no upper limit to the amount of third-party investment that companies can attract.

The funding is provided as a convertible loan. A convertible loan in a form of a loan note will have the rate of conversion into equity pre-set at a 20% discount to the price paid by the new investors in that fundraising round and provides the government with the opportunity to convert the loan to equity if the company does well otherwise, the loan stays as debt which ranks ahead of existing shareholders.

Before the loan is converted to equity, interest will accrue at a minimum rate of 8% per annum (non-compounding) and could be higher if agreed between the company and investors. Interest will not be payable on a monthly basis and will accrue until the loan matures after a period of 36 months or is converted at which point the interest is repaid or converts to equity.

The Scheme is third-party investor led and third-party investors must meet one of a number of criteria to participate in the Scheme i.e. that they are a certified sophisticated investor or an investment professional or a certified high net worth individual etc. The onus is placed on the investors to ensure that all the other investors are eligible.

The form of the convertible loan note is non-negotiable and the Future Fund requires companies to appoint a company solicitor to advise them on the Scheme, the legal documents and facilitate the payment mechanics at completion of the convertible loan agreement.

Is your company eligible to apply to the Future Fund?

Eligible companies must:

be UK-incorporated and if part of a corporate group, only the parent company is eligible;
have previously raised at least £250k in equity investment from third party investors in the last five years;
attract at least 50% of third-party investment;
not have any of their shares traded on a regulated market, multilateral trading facility or other listing venue;
have been incorporated on or before 31 December 2019; and
have half or more employees based in the UK or have half or more of their revenues generated from UK sales.

If you have any queries about this topic, please contact the Edwin Coe Start-up team.

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