April 21, 2020

The ‘Future Fund’- the long awaited financial support for entrepreneur and start-up


The support package is finally here. The Government announced a £1.3bn package to support entrepreneurs and start-ups that are not eligible for existing coronavirus rescue schemes.

The announcement will be a relief for many start-ups which have been struggling to survive as the equity fund-raising slows down. The UK start-ups community is booming and one example is the tech sector including FinTech and HealthTech. Support for them is vital; they are the future and will play an imperative part to help the UK economy bounce back once the pandemic is behind us.

The scheme will enable access to the capital required during these difficult times to ensure start-ups across all sectors are able to not only survive but to thrive and prosper, creating new innovative and creative solutions and ideas.

What support is being provided?

The scheme will provide loans to UK-based companies ranging from £125,000 to £5 million, subject to meeting the qualification criteria and other key terms set out below.

The scheme will be delivered in partnership with the British Business Bank. The headline terms of the loan described it as bridge funding and the loans will be in the form of convertible loans.

The loan can only be used for working capital purposes and cannot not be used by the start-ups to repay any borrowings, make any dividends or bonus payments to staff, management, shareholders or consultants or pay any advisory or placement fees or bonuses to external advisers.

When will the scheme open?

The scheme will officially begin in May, but start-ups should start reviewing the guidance and preparing now. This will ensure that they have the information readily available to submit their application when the scheme officially opens.

They should also start having discussions with third-party investors to ascertain their appetite to provide additional funding. Without third-party investors support, the scheme will fail.

What is the catch?

Qualification criteria

In order to qualify for the scheme, the start-up must:

  • be a business is based in the UK, and
  • have previously raised at least £250,000 in equity investment from third-party investors in the last five years.

Matching investment

Any funding provided under the scheme must be matched by third-party private investors and institutions.

Equity and discounted rate

The loans would be in the form of convertible debt, converting into an equity stake at a discounted rate if they are not repaid. That would effectively mean taxpayers may become direct part-owners of high-growth businesses.

The conversion will take place on the company's next qualifying funding round at a minimum conversion discount of 20% to the price set by that funding round.

The Government shall not set a valuation cap on the price at which the loan converts into equity. Where the matched investors have agreed a valuation cap with the company, the Government shall be entitled to those same terms.

A note of caution for start-ups, the discount rate could be higher if agreed between the company and the matched investors.

Interest rate

The Government shall receive a minimum of 8% per annum (non compounding) interest to be paid on maturity of the loan. The interest rate may be higher if a higher rate is agreed between the company and the matched investors.

Our commentary

The government guidance set out that full eligibility criteria will be published in due course.

However, to be eligible for the scheme there is a hefty criteria. Some start-ups are new and will automatically not qualify for the new scheme.

The requirement for matched investment may put start-ups off. Some start-ups may struggle to raise the private investment as the equity fund-raising markets shows signs of slowing down. The Government's rationale behind the matched investment is that they want to support start-ups that the private sector investors regard as viable, thus reducing the Government's risk in respect of the investments. The last thing the Government will want to do is waste tax-payers money on non-viable businesses.

On the other hand, the support from the Government may provide the comfort that third-party investors are looking for. Many funds, private equity houses and private investors have funds available to invest and they may look at this small window of opportunity to explore investment in start-ups. The key will be to ensure that the businesses are viable. The key for the success of the scheme will be access and speed. When the CBILS loans were announced, the uptake was slow due to the administrative burden and red tape. We hope that lessons have been learnt and access to the funding will not be delayed.

Start-ups should start having discussions with their accountants and financial advisers to ensure that the figures stack up. The terms of the convertible loans are complex and start-ups should ensure that they obtain the right professional advice from their financial and legal teams.

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