The Future Fund is a matched funding scheme launched by the Government to support innovative companies during the Coronavirus outbreak. The Government will initially make available up to £250m with the potential for further support on the basis of review.
It will run from 20 May 2020 until 30 September 2020. It is not designed for companies facing difficulties but rather to make it easier for businesses to access growth capital.
Is my company eligible for the scheme?
You must be an unlisted UK registered company (no age limit) registered pre 31 December 2019.
In order to qualify for the scheme, companies will need to have raised at least £250,000 in aggregate between 1 April 2015 – 19 April 2020 from third party investors (e.g. not from founders, employees, or connected persons).
Amounts received pursuant to existing advance subscription agreements (which are outstanding and pursuant to which, no shares have yet been issued) will not qualify for the £250,000 prior funding eligibility criteria.
What financial instrument will be used for the loan?
A matched convertible loan of between £125,000 and £5m. The Future Fund loan will take the form of unsecured bridging funding which must constitute no more than 50% of the total bridging funding being provided. In other words half or more of the bridging round must be provided by third party investors.
Is there a cap on the bridging round?
No. There is no cap on the total round, but the Future Fund loan must be the lower of 50% of the bridging round and £5m.
Can any investor be the matched funder?
No, as previously stated, the investor must be a third party (e.g. not from founders, employees, or connected persons).
Are (S)EIS investors compatible matched funders?
No, the scheme is not compatible with the existing EIS and SEIS regimes, and will not otherwise benefit from any preferential UK tax regime. This is largely due to the instrument being a convertible loan note which is not EIS qualifying.
The reasoning behind why an instrument that is not EIS qualifying has been chosen is unknown but it means that the government will end up backing more startups vetted by professional investors (VCs) rather than crowdfunders or friends and family, with potentially better outcomes. But also because EIS and SEIS supported investment already getting state support.
Is there a location restriction?
You must have a substantive economic presence in the UK; (similar to the EIS/VCT criteria); the parent company needs to be a UK registered company to be eligible); and eligibility is subject to customer fraud, money laundering and KYC checks.
This will unfortunately exclude companies that have taken part in international accelerators where the criteria is for a US Topco.
What is considered as a substantive economic presence in the UK?
The Government has clarified the eligibility criteria, which require a company to either: (i) have at least half of its employees based in the UK; or (ii) generate at least half of its revenues from sales in the UK.
Can I get matched funding for funds raised previously?
No, the Government has confirmed that only funds raised in connection with an application will be eligible for matched funding from the Future Fund.
Are the Future Fund terms negotiable?
Only four items are negotiable: (i) the interest rate (which shall be at least 8%); (ii) the conversion discount rate (which shall be at least 20%); (iii) any headroom for investments on the same terms which may be made within 90 days of the Future Fund documentation being executed (although such amounts will not be matched) (iv) any valuation cap on conversion. Otherwise, the terms of the convertible loan agreement to be entered into are standardised.
What if I have not yet received the funds from a previous agreement?
Companies which have either: (i) agreed convertible instruments or new funding rounds but not yet received the relevant funds or issued shares; or (ii) already received funding but have an option to repay such funding (e.g. pursuant to a convertible loan), should have the option to renegotiate with their investors to cancel such investment terms or repay such funding and reinvest such amounts in connection with an application for matched funding.
Will I be required to offer security for the loan?
No. The Future Fund loan is unsecured.
What can I use the Future Fund loan for?
The bridge round must solely be for working capital and must not be used to repay any borrowings, pay dividends or bonus payments to staff, management or shareholders or consultants (save for where there are existing historic obligations to staff).
Specifically, the Future Fund loan cannot be used to pay any advisory or placement fees or bonuses to advisors.
How does conversion work?
Either: The Future Fund and associated third party bridging will automatically convert to equity at the next “qualifying round”. This will require a minimum discount to that future round of 20%.
Or: The Future Fund and associated third party bridging will, if not repaid by the maturity date (maximum of 36 months), automatically convert into equity at a 20% discount to the last funding round. Unless, the Government requires repayment of the loan.
Will the loan always convert into equity?
No. On maturity of the loan (maximum of 36 months) the loan can be repaid with interest and redemption premium which is equal to 100% of the loan.
What rights will the Government have as a result of the agreement?
The Government shall have the right to receive a quarterly report setting out customary financial and investment information.
In addition to the above, certain historical financial information must be provided within 90 days of signing the agreement.
Allows the Future Fund to request a meeting with the company prior to a conversion event to discuss the governance rights that Future Fund may have following the conversion event.
It also allows the Future Fund to either demand repayment of the outstanding loan or sell back its shares to the company, in each case for £1 in the event that the Future Fund determines that it would be prejudicial to reputation for the Future Fund to continue holding its interest.
If an exit occurs within 6 months after a non-qualifying financing in which the lenders elect to convert their loans into shares, the Future Fund and the matched investors will receive the higher of the amount received for their shares in connection with the exit, and the amount they would have received had their loan been repaid with a redemption premium on the non-qualifying financing, rather than converting. Separately, the right to benefit from any enhanced terms received by an investor within 6 months of conversion has also been included in the long form document.
Entitlement to transfer the loan or the converted shares to an institutional investor acquiring a portfolio of the Government's interest in at least ten companies owned in respect of the Future Fund.
I am getting other kinds of aid to help respond to COVID-19 – can I still get a loan?
No, there is no indication that accessing any of the other Government support will preclude or limit applications to the Future Fund.
Can I choose to repay money received from the Future Fund before maturity?
No, a repayment option in favour of the company has not been included in the revised terms. Accepting matched funding from the Future Fund is likely therefore to result in the relevant government vehicle becoming a shareholder in the company.
Is the Future Fund tranched or ring-fenced in anyway?
No, the Government has confirmed that the Future Fund will not be divided up into smaller pots reserved for different levels of investment.
How will the funds be allocated and what if there is over demand?
Funding will be dispensed on a first come first served basis, although this will become less relevant in the event that the size of the Future Fund is increased at a later date (which is what is expected to happen should there be over demand).
Who makes the application?
The application is to be made by the lead investor rather than the company.
How long does it take to process an application?
It is anticipated that it will take 21 days from submitting an application being in receipt of funds.
Does my matched funding need to be confirmed at the time of application?
At the time of application, the lead investor will also need to confirm the total amount of funding to be raised plus contact details for all other investors.
What information will be asked for?
Basic information will be requested at first (why applying, names of investors etc). A number of checks on the proposed Investor(s) and Company (including KYC and AML checks) certain historical financial information must be provided within 90 days of signing the agreement.
Further, the Government may request the same information as is provided to other lead or major investors in the company pursuant to existing investment documentation. However, the board may decide to withhold such information for commercial sensitivity or legal privilege, provided it acts reasonably and unanimously.
BDO has expertise in working with businesses seeking to raise funds from a variety of sources including banks, specialist lenders, venture capital and private equity. Our experience of both investing in and advising growth businesses means we are uniquely placed to support you to prepare for and successfully raise capital.