On 20 April 2020, the UK Government announced a new scheme to provide financing to UK start-ups and scale-ups in the form of a convertible loan which is invested directly by the Government, alongside a company's existing investors. The scheme has been called the Future Fund.
Orrick has been advising HM Treasury alongside a consortium of three other leading law firms to devise the Future Fund in response to calls from the technology industry to support VC backed start-ups. Leading investors and VC firms, as well as UK start-ups and scale-ups issued stark warnings that the UK could lose a generation of start-ups without further Government support during the COVID-19 crisis. Whilst smaller and larger businesses on either side have been able to benefit from schemes such as the Coronavirus Large Business Interruption Loan Scheme and the Coronavirus Business Interruption Loan Scheme, start-ups and scale-ups are generally expected to be ineligible for those schemes, often because they are unprofitable.
The Future Fund, which has been devised to address this issue, will in partnership with the British Business Bank deliver state-issued convertible debt (rather than traditional bank loans being offered in the other schemes) to eligible businesses, provided that this is matched at no less than 50% by other private third party investor(s) (the "Matched Investors").
Form of Loan: The Government loan will be for a minimum amount of £125,000 and a maximum amount of £5,000,000, in the form of an unsecured convertible loan note ("CLN") which is convertible into equity in the following scenarios:
any equity fundraising in excess of the total convertible loan amount at a minimum conversion discount of 20% (the "Discount Rate") to the price set by that funding round, with a Company repayment right in respect of the accrued interest (a "Qualified Fund Raising");
the maturity date, being 3 years from the date of the convertible loan note into equity at the Discount Rate to the price set by the most recent funding round, although the Discount Rate shall not be applied if that funding round was prior to the date of the CLN. The holders of a majority of the principal amount held by the Matched Investors (i.e. excluding the Government) (in respect of all Noteholders) or the Government (in respect of itself only) may instead elect for the CLN to be repaid by the Company with a 100% redemption premium; or
an Exit (Share Sale, Asset Sale or IPO) at the Discount Rate to the price set by the most recent non-qualifying funding round, although the Discount Rate shall not be applied if that funding round was prior to the date of the CLN, although the note shall be repaid with a 100% redemption premium, if that would deliver a higher return; or
at the election of the holders of a majority of the principal amount held by the Matched Investors (i.e. excluding the Government) upon any equity fundraising which is not a Qualified Fund Raising, at the Discount Rate to the price set by that funding round.
Eligibility Criteria: The full eligibility criteria for the Future Fund are yet to be finalised; however, to be eligible for a loan from the Future Fund, the applicant must be an unlisted UK registered parent company with a substantive economic presence in the UK. The applicant must also have raised at least £250,000 in aggregate from private third-party investors in the last five years.
What you need to know: a summary of the main terms currently proposed is set out below, and you can view the detail on the Government's website here.
Match funding: third party private investor(s) must provide at least 50% match funding prior to the Government's investment; however, the scheme does provide for there to be additional follow-on convertible loans on the same terms from other investors (subject to a most favoured nation provision).
Discount Rate: a minimum of 20%, although if Matched Investors and the Company agree to apply a higher discount rate, this will apply equally to the Government's CLN.
Interest: non-compounding interest will accrue at a minimum of 8% per annum, to be converted without the Discount Rate applying or, at the option of the Company repaid in cash on conversion of the loan. As with the Discount Rate, if Matched Investors and the Company agree to apply a higher interest rate, this will apply equally to the Government's CLN.
Valuation Cap: there will be no cap to the valuation of a future equity financing, a common term often included in convertible loan notes; however, if Matched Investors and the Company agree to apply a valuation cap, this shall apply equally to the Government's CLN.
Maturity Date: the loan shall mature after a maximum of 3 years.
Shareholder Rights: in seeking a balance between protections of the Company and Matched Investors, the Government has elected for only limited corporate governance rights during the term of the loan and as a shareholder following conversion of the loan.
Transferability: the Government shall be entitled to transfer the loan and any shares arising following conversion of the loan, without restriction within the Government and/or as part of a portfolio sale of the Future Fund interests.
Non-Negotiable: each convertible loan agreement will be on standard terms with no opportunity for negotiation beyond the afforded flexibility in respect of the Discount Rate, Interest Rate and applicability of a Valuation Cap, as set out above.
How do you apply: The application process is currently under development by British Business Bank.
The details remain under discussion. We will continue to keep you updated as full and final details of the scheme evolve (including full eligibility criteria and the standard form documentation), but please do not hesitate to contact us if you have specific questions in the meantime.