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As the Coronavirus crisis continues to affect businesses all over the country, the government has introduced a number of different measures to help protect the economy and businesses’ futures. One such measure, announced by the Chancellor of the Exchequer, Rishi Sunak, on 20 April 2020 and which opened for applications on Wednesday 20 May 2020, is called the “Future Fund”. 

The Future Fund is aimed at providing convertible loans to innovative UK businesses which normally rely on equity investment, with loans ranging in value from £125,000 to £5,000,000. The government has made £250,000,000 available for the Future Fund, and applications are open until the end of September 2020. 

Is your business eligible?

In order to be eligible, your business must:

1. Be UK-incorporated – if it is part of a corporate group, only the parent is eligible;
2. Have raised at least £250,000 in equity investment from third party investors in the last 5 years;
3. Not had any of its shares traded on a regulated market; 
4. Have been incorporated on or before 31 December 2019; and
5. At least one of the following statements is true:
   1. Half or more of the employees are UK-based; and
   2. Half or more of the company’s revenue comes from UK sales.

What are the key features of the loan?

Under the terms of the loan, convertible loan notes will be issued to a government-run limited company called UK FF NOMINEES LIMITED. The key features to bear in mind are:

1. Investor-led process: the scheme is ‘investor-led’ meaning that investor funding must be secured prior to applying, and the application must be made by the lead investor.
2. Use of proceeds: the funding can solely by used for working capital purposes, and shall not be used by the company to repay any borrowings, make any dividends or bonus payments to staff, management, shareholders etc.
3. Interest Rate: the interest rate shall be a minimum of 8% per annum. This will depend upon what rate has been agreed with the matched investors.
4. Term: the loan will mature after 3 years.
5. Government rights: the government will look for basic shareholder rights including limited corporate governance rights, transfer rights, fundamental warranties, amongst others.
6. SEIS/EIS Relief: the scheme is currently not SEIS/EIS compatible.
7. Distribution of funds: the funds are only dispersed through solicitors, so the company must have a firm of solicitors instructed to receive and disperse funds to them.

How does the loan convert into equity?

Under the terms of the Future Fund, the loan will automatically convert into the most senior class of shares on either an event of default by the company under the terms of the loan agreement, or in any of the following circumstances:

1. Automatically on the next funding round at which the company raises money equal to or more than the sum of the aggregate loan amount;
2. At the discretion of the lenders who are owed a majority of the monies under the loan agreement, on a funding round where the company does not raise money at least equal to the aggregate sum of the loan amount;
3. Automatically on a sale or IPO of the company; or
4. Automatically on the maturity date. 

As many leaders in the business community have commented so far, this fund appears to be enormously significant and widely welcomed. It is clear that for many of the venture capital-backed businesses that we act for it will serve to build a channel from the lamented losses and challenges experienced today to a strong period of recovery, enabling these businesses to survive and with time, once again thrive. If you require assistance with how to apply or you simply want to talk through your options, please contact me at aknights@lawstep.co.uk or on 020 7936 8888.