The Future Fund simply explained

The Future Fund simply explained

The Future Fund is a £500m fund, half of which comes from the UK Government, the other £250m from investors in the private sector. The funds will be available as Convertible Loans.

Who is eligible?

In order to be eligible for Convertible Loans from the Future Fund, companies must:

The proceeds of the Convertible Loan cannot be used to repay any borrowings from a shareholder, or pay bonuses, dividends or advisory fees for the next 12 months.

Which investors are eligible?

The British Business Bank specifies that eligible investors must fall within one of the following categories:

Please be aware that all other investors must fall within one of the above categories in order to be eligible to invest in the convertible loan agreement. It is the responsibility of these other investors to ensure they are eligible.

How does the Scheme work?

The Scheme is being delivered in partnership with the British Business Bank starting on Wednesday 20 May 2020, in the form of convertible loans.

The current plan is for it to remain open until the end of September 2020.

A convertible loan is an investment tool that allows companies to raise finance from one or multiple investors, who agree to provide funding that can either be repaid at a premium or convert into equity at a later date, and at a discount rate.

Specific to the Future Fund, convertible loans under the scheme will work as follows:

The government is committing an initial £250m in funding towards the scheme, which will be open until the end of September. The funds will be provided on a first-come-first-served basis, so it’s a good idea to apply as soon as possible if you’re eligible.

The Government has specified that while investment within the Scheme isn’t EIS-eligible, investors who have previously invested under EIS or SEIS won’t jeopardise their eligibility by participating in the Scheme.

What’s the application process?

The Scheme is being described as “investor-led”, i.e. the lead investor is responsible for ensuring eligibility and applying for the government funding.

  1. Investors looking to obtain match-funding from the government under the Scheme will create an account on the dedicated website.
  2. On the site they will be asked to certify that they meet the eligibility criteria and provide details about the investment and company.
  3. The company must confirm that all the details submitted are accurate.
  4. Provided that the investment meets all the eligibility criteria, the match funding will be provided under a Convertible Loan Agreement.
  5. The Agreement template allows the investors and the company to agree details such as the discount rate (which has to be at least 20%), the interest rate (which has to be at least 8%), and – optionally – a valuation cap and headroom amount. Other than these details, the Agreement doesn’t leave any room for negotiation.

How much you can raise?

The amount of the loan provided by the Government is set between a minimum of £125,000 and £5,000,000 – as long as this amount is matched by a private investor.

There is no limit to the amount that the matched investor(s) may loan to the company and therefore no cap on the aggregate funding being provided.

Repayment and conversion

One of the key considerations is that the loan will automatically convert into equity upon the company’s “next qualifying funding round”.

When the conversion occurs, the government and the matched investor(s) will acquire shares in the company for the original value of the loans at a share price discounted by at least 20%.

When converted, the loan automatically turns into the most senior class of shares in the company. If more ‘senior’ shares are issued within 6 months from the conversions, the holders can still convert their shares into the most senior class.

Qualifying round

A funding round successive to the loan is “qualifying” as long as the amount raised is equal or higher than the aggregate amount of the loan.

Even when a round is not in itself “qualifying”, the investors and the government can still opt to convert the loan into equity at the share price set by the funding round, discounted by at least 20%.

If the company exits

If the company is sold or goes public before a qualifying funding round, the loan will either:

Note that on exit if the most recent funding round took place before the loan was issued the discount rate will not be applied.

What if the loan matures before a qualifying round?

If the loan reaches the end of its term before a qualifying round, it is up to the holders (the government and matched investors) to choose whether to:

What’s in the small print

According to the Headline Terms of the Fund published on 20 April 2020, these are the additional clauses and terms that come with the funding.

In addition, the government shall be entitled to transfer any of its shares without restriction within government and to entities wholly owned by central government departments.

We’re told once companies and their investors complete an application they should receive funds in as little as 14 days.

We’re here to help. Since you register with Swoop, our team will be able to assess your eligibility, review your deck (if eligible) and match you to relevant potential investors who can apply for co-investment from the Future Fund.

Register your business here.  For more information on other funding options available to you please visit our website swoopfunding.com.

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