The Chancellor has announced the launch of a £500m co-investment fund for start-ups adversely impacted by the coronavirus. The 'Future Fund' operates through the government matching private sector money with state-backed loans that can convert into equity stakes in the start-up.
As start-ups are frequently loss making initially as they invest to grow, they are likely to be ineligible for the other forms of government funding, as they may not be able to prove that they were in sound financial health prior to COVID-19. The Chancellor is keen to bridge this gap to ensure that firms in the dynamic sectors of the UK economy are protected through the crisis in order that they can continue to develop innovative products and help power UK growth.
The Future Fund is to be delivered in partnership with the British Business Bank and will launch in May. The fund will provide UK-based companies with between £125,000 and £5million from the government provided that such cash is at least matched by private investors (there shall be no cap on the amount that the matched investor may loan to the start-up). To be eligible, a business must be an unlisted UK registered company that has previously raised at least £250,000 in equity investment from third party investors in the last five years. The more detailed headline terms are available here.
The government's bridge funding shall automatically convert into equity on the start-up's next qualifying funding round 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 accrued interest. On a non-qualifying funding around, at the election of the holders of a majority of the principal amount held by the matched investors, the bridge funding shall convert into equity at the Discount Rate to the price set by that funding round.
Certain features of the Future Fund suggest that it will work well in practice. The headline terms are similar to the types of terms that investors, start-ups and lawyers are comfortable/familiar with, which is likely to drive efficiency. Also, the use of convertible loan notes is appropriate in these circumstances as it postpones attributing a valuation to a start-up, which can be a cause of time-consuming debates. These features suggest quick access to funds. Although, there is a question of how quickly the government will be able to process the applications, which has been problematic for other types of government financing. Further details about how to apply to this scheme will be published shortly, we will provide an update when more information is released.
The Future Fund provides some hope for innovative companies and the millions that they employ and hope that the UK will continue to be a leader in the tech industry.
We are seeing a lot of interest in this fund and are assisting clients on issues around eligibility and preparing for its launch. Please get in touch with Sukh Ahark or your usual RPC contact if you have any questions.