Following the announcement of the Future Fund on 20 April 2020, the UK Government and the British Business Bank have announced that the application process for the scheme is now open (20 May 2020) here.
The British Business Bank have provided some additional helpful information on their website, including further clarity regarding eligibility criteria for companies and investors, as well as FAQ sections for both companies and investors.
Applications for matched funding will be processed on a first come first served basis, with decisions estimated to take around three weeks. The initial pot of funds reserved for the Future Fund is £250 million (although this may be increased if demand is as high as it is expected to be) and availability under the scheme may be limited. Accordingly, you will need to act quickly if you want to use the scheme.
As we noted in the summary we published on 21 April 2020, the the Future Fund will be administered by the British Business Bank, which will invest between £125,000 and £5 million per company in high-growth UK companies.
The Future Fund will invest by way of convertible loans, the terms of which are prescribed by a non-negotiable convertible loan agreement (CLA) now available for review here.
The British Business Bank has now clarified that (amongst other things) the investee company must:
- have raised £250,000 in the past 5 years through equity funding (excluding any unconverted convertible loan notes, advance subscriptions or similar);
- be an unlisted UK registered company which was incorporated on or before 31 December 2019. If the company is part of a group, the ultimate parent company must satisfy this condition; and
- have a substantive economic presence in the UK which requires that either (i) half or more of its employees are based in the UK; or (ii) half of more of its revenues are made from UK sales.
The eligibility criteria for investors are wide, but it is worth noting that the Future Fund will only match funding from third-party investors. This means that any funding from founders, employees, workers or consultants (and their connected parties) will not be eligible for matched funding.
Whilst the British Business Bank is keen to highlight (and do so in the FAQ section for investors on their website) that HM Treasury and HMRC are responsible for all decisions relating to tax reliefs, including in relation to SEIS and EIS relief, they note that it is their expectation that the structure of the CLA does not meet existing rules for SEIS or EIS eligibility.
Perhaps unexpectedly, the application process is investor-led, meaning that a “lead investor” must make the application and must identify the source(s) and total amount of the funding they will provide, together with any other private funding to be provided as part of the same round. Further details about the information that the lead investor will need to provide at the application stage is available as part of the Investor FAQ here. The lead investor does not necessarily need to be the largest investor, but must be investing at least £12,500 pursuant to the CLA.
There is no restriction on how many applications an investor may make (if, for example, it has multiple portfolio companies and wishes to apply on behalf of a number of them), but if there is a high volume of applications received on a certain day (which we certainly expect to be the case in the coming days/weeks) only one application from a specific investor will be processed per day. As such, it is important for an investee company to agree with its investor group who the most appropriate “lead” is for the purpose of making the application.
Once the application has been made by the lead investor, the investee company will receive email instructions as to how to progress the application. Details of the information that the company will need to provide are available as part of the Company FAQ here.
Future Fund investment terms
The detailed terms attaching to the Future Fund’s investment have now been provided, and these follow the Heads of Terms originally published on 20 April 2020. The terms of the CLA are generally non-negotiable apart from the terms relating to (i) the interest rate (which shall be at least 8%); (ii) the conversion discount rate (which shall be at least 20%); (iii) headroom for investments to be made 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); and (iv) any valuation cap on conversion.
As previously noted, some of the key terms are:
- On a conversion event (see below), the loan shall convert into the most senior class of shares in the company at the time of conversion or if a further funding round is completed within six months of the conversion event, the lenders shall be entitled to convert their shares into the senior class of shares of the company in issue post that follow-on round.
- The Government shall receive a minimum of 8% per annum (non-compounding) interest to be paid on maturity or converted into equity on a conversion event.
- The Government shall have limited corporate governance rights during the term of the loan and shall be entitled to request a meeting with the Company to discuss in good faith any governance rights it will have on conversion. The terms provide an important qualification that the company shall be under no obligation to agree to provide any specific shareholder rights.
- The loans shall be used solely for working capital purposes.
- The loans (together with accrued interest) shall automatically convert into equity on the event of company’s next qualifying round at a minimum conversion discount of 20% to the price set by that funding (the Discount Rate) (or higher, if a higher rate is agreed with the matched investor(s)).
- A qualifying funding round shall take place where the company raises an amount in equity capital (excluding any shares issued on conversion of the loans or to employees/consultants on exercise of any options) equal to at least the aggregate amount of the loans under the CLA (any other equity funding rounds shall be a non-qualifying funding round).
- On an exit (including a change of control, asset sale or IPO) prior to conversion the loan shall either convert into equity (at a discount rate, as further detailed in the CLA) or it shall be repaid with a redemption premium equal to 100% of the principal (the Redemption Premium), whichever shall provide a higher amount to the lenders. If the Sale or IPO happens within six months of the loans converting on a non-qualifying financing round, the lenders can still benefit from the cash premium described in above, such that they would receive what they would have received had they not converted (if higher).
- On maturity of the loan (being 36 months from entry into the CLA) the loan shall either (i) convert into equity (at a discount rate, as further detailed in the CLA); or (ii) at the election of (a) the Future Fund in respect of its loan; or (b) a majority of the others lenders in respect of all other loans, be repaid by the company with the Redemption Premium.
Bird & Bird
The above is only a high-level guide to the main investment terms of the Future Fund and there are other terms that will need to be considered if you are contemplating participating in this matched funding programme either as an investee company or as an investor. You should therefore seek advice from an early stage.
In any event, investee companies will be required to appoint solicitors to (i) hold the matched funding in their client account; and (ii) provide a confirmation letter to the Future Fund that they are holding the matched funding (which will begin the process of the release of the Future Fund’s investment). Advice should also be obtained to assess whether there are any consents or other approval requirements under existing documentation relating to the investee company (e.g. their shareholders’ agreement and articles of association) or applicable law.
Bearing in mind that the company’s solicitors will also be required to run anti-money laundering checks on all matched funders in order to be able to hold the matched funds in their client account, it is worth appointing solicitors as early on in the application process as possible to avoid any unnecessary delays.
Bird & Bird’s leading Venture Capital team would be very pleased to assist you with any queries you may have in relation to the Future Fund and to assist you with the Future Fund application process, so please do not hesitate to get in touch with us directly or through the twoVenture platform.