By Will Macauley
In addition to the various government schemes to protect existing businesses, employees and the self-employed during the coronavirus pandemic, the government has created a new loan scheme to support new ventures: the Future Fund. The Future Fund allows start-ups reliant on equity investment to obtain funding that they may not be able to achieve via a convertible loan from the government.
Who can take advantage of the Future Fund?
The Future Fund is available to UK incorporated companies which meet certain eligibility criteria:
it must have raised at least £250,000 in equity investment between 1 April 2015 and 19 April 2020;
its shares must not be listed;
it was incorporated before 31 December 2019;
at least half of its employees are UK-based and/or half or more of its revenues are from sales in the UK.
These criteria are not final, as further details of the scheme are to follow. However, it is notable that, unlike other schemes arising in response to the coronavirus, the pandemic itself does not factor into the eligibility criteria.
What can be borrowed?
The Future Fund allows businesses to draw loans matched of up to the level of equity investment they have obtained, subject to a minimum of £250,000 and a maximum of £5 million. Equity investment can exceed the £5 million limit, but this is the level at which the Future Fund matching is capped.
The Future Fund is intended to be used as working capital to allow businesses to endure the coronavirus pandemic. While there are no specified ways that funds must be spent, there are restrictions against the use of the loan for any of the following purposes:
repaying shareholder lending or paying dividends;
paying discretionary or extraordinary bonus sums;
paying advisory or placement fees to corporate financiers or investment banks.
What are the terms?
The full standard Convertible Loan Agreement is available on the government website. The Agreement requires that the equity investors are a party, along with the investee company and Future Fund entity. Many of the terms are linked directly to the terms offered to the matched equity investors, though subject to minimums. The following is a summary of key terms:
The interest rate of the loan is matched to that payable to the matched equity investors, subject to a minimum of 8% per annum.
The maximum term of the loan is 36 months.
As a convertible loan, any loan capital and interest unpaid at maturity convert into shares.
The share price for conversion is linked to other equity investment in the business.
As well as the matching to other equity investment, the share price is subject to a minimum discount of 20%.
How can we help?
The Future Fund scheme is subject to a complex debt structure. We, in tandem with your financial advisors, can advise on this structure and the terms of the Agreement presented to you, whether you are a business taking advantage of this scheme or an investor whose investment is being matched.
It is a requirement of the scheme that the equity investment to be matched is released to a UK regulated firm of solicitors to facilitate the formal completion of the Agreement. Under the scheme rules, the Future Fund loan monies would are then released to the same firm of solicitors for onward release. We are able to provide this service.
If you are taking advantage of the Future Fund loan scheme and would like to discuss any of the above, please do get in touch with Anthony Wilcox, Partner in Employment Law & HR Advice or Jamie Berry, Partner and Head of Business Law.