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UK government announces £250m Future Fund scheme to assist start-ups

This week the UK government has announced a scheme aimed at providing support for “firms driving innovation” to help power “growth out of the coronavirus crisis”.

Delivered in partnership with the British Business Bank, the Future Fund is due to launch in May and will be open initially until the end of September 2020. It will issue convertible loans for amounts between £125,000 to £5m to innovative companies which are facing financial difficulties due to the coronavirus outbreak. The funds available are made up of £250m of funding from the government, combined with matched funding from the private sector (i.e. £250m).

The Future Fund is available to companies which:

  • are unlisted and UK registered;
  • have previously raised at least £250,000 in equity investment from third-party investors within the last 5 years and have a “substantive economic presence in the UK” (i.e. they are predominantly operating in the UK); and
  • can attract the equivalent matched funding from third-party private investors and institutions.

Key Headline Terms 

Matched funding – The government will make unsecured bridge funding available alongside other private third-party matched investor(s). The loan will constitute no more than 50% of the bridge funding being provided to the company.

Loan size – Loans granted will be for a minimum of £125,000 and up to a maximum of £5m. There will be no cap on the amount that the matched investor(s) may lend and, consequently, no cap on the aggregate bridge funding.

Use of proceeds – The proceeds are to be used solely for working capital purposes and cannot be used to repay any borrowings, issue dividends or make bonus payments.

Conversion – The loan will automatically convert into equity on the company’s next qualifying funding round at a minimum conversion discount of 20% (unless a higher rate is agreed between the company and the matched investors).

When the loan matures, at the option of the holders of a majority of the principal amount held by the matched investors, the loan will either:

  • be repaid by the company with a redemption premium (equal to 100% of the principal of the bridge funding); or
  • convert into equity at the discount rate of 20% to the price set by the most recent funding round, provided that the government’s loan will convert unless it requests repayment in respect of its loan.

On conversion of the loan, only the principal under the bridge funding (and not any accrued interest) will convert at the 20% discount rate and any accrued interest not repaid by a company will convert at the relevant price without the 20% discount rate.

Valuation cap – The government will not set a valuation cap on the price at which the loan converts into equity on the company’s next funding round, although, where the matched investors have agreed a valuation cap with the company, the government will be entitled to those same terms.

Conversion equity – On a conversion event, the loan will convert into the most senior class of shares in the company. If more senior shares are issued in a subsequent round within six months of conversion, the lenders will be entitled to convert their shares into ones of the same, more senior class.

Interest rate – The government will receive a minimum of 8% per annum; this is to be paid when the loan matures. (If the company agrees a higher rate with the private investors, the government will receive that higher rate.)

Term – The loan will mature after a maximum of 36 months.

Decision-making – The government will have limited corporate governance rights both during the loan term and as a shareholder following conversion.

Warranties – The company will provide limited warranties to the lenders, including in respect of title/ownership, capacity, loan eligibility (in accordance with the government eligibility criteria), compliance with law, the company’s borrowing facilities, litigation and insolvency events.

Covenants – The company will provide limited covenants to the government during the loan term and as a shareholder following conversion, including in relation to fair and equal treatment, and equal information rights with other investors.

Most favoured nation –  If the company issues further convertible loan instruments with more favourable terms, those same terms will also apply to any funding provided under the Future Fund.

Negative pledge – The company will not permit the creation of any senior indebtedness (save for bona fide third-party indebtedness).

Transfer rights – The government will be entitled to transfer the loan and, following conversion, any of its shares without restriction to an institutional investor which is acquiring a portfolio of the government’s interest in at least ten companies owned in respect of the Future Fund. Additionally, the government will be entitled to transfer any of its shares without restriction within government and to entities wholly-owned by central government departments.

The headline terms and the eligibility criteria are yet to be finalised. We expect that further details on this package will become available over the next few weeks. In the meantime, the draft headline terms of the Future Fund can be downloaded in full through the following link: https://www.gov.uk/guidance/future-fund

WAB comment

The UK’s Future Fund announcement follows similar moves by France and Germany, which have both launched packages to support start-ups which will provide €4bn and €2bn, respectively.

The Future Fund has been welcomed by the “Save Our Startups” campaign, which was launched at the start of April by a number of organisations, including crowdfunding platform Crowdcube and Coadec (the Coalition for a Digital Economy). The campaign issued an open letter calling for the government to support the UK’s start-ups and high-growth businesses, attracting over 6,000 signatories.

The Fund has, however, also come in for considerable criticism, some of which may be addressed as further details are released. Key issues include that:

  • at £250m, the size of the funding pot is too small to benefit more than around 1,000 start-ups;
  • the onerous nature of some terms (which start-ups will not be in a position to negotiate);
  • the matched funding requirement and the eligibility criteria will limit the take-up of the scheme;
  • commentators have suggested that the scheme may not be compatible with the Enterprise Investment Scheme or the Seed Enterprise Investment Scheme, which may deter investors; and
  • with applications only starting in May, the timeframe for when funding will reach start-ups is unclear.

While key details of the scheme are yet to be refined and full implementation to be agreed, the UK government’s announcement appears to be a positive first step during these unprecedented times. The government has had to perform a careful balancing act here: it needs to be seen to be using taxpayer money wisely, whilst ensuring that private investors benefit commensurately and that start-ups receive the urgent help they need. However, it remains to be seen how the scheme will translate into practice and how many start-ups will actually receive the funding.

Disclaimer: This article is produced for and on behalf of White & Black Limited, which is a limited liability company registered in England and Wales with registered number 06436665. It is authorised and regulated by the Solicitors Regulation Authority. The contents of this article should be viewed as opinion and general guidance, and should not be treated as legal advice.

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