UK Government Future Fund is now live: is start-up support package salvation for the few and not the many?
Applications are now invited for UK start-up and scale-up companies which wish to access the Future Fund, a matched-funding scheme whereby £250m will be invested by HM Treasury in qualifying companies.
We analysed the scheme in some detail when the Future Fund term sheet was published on 20 April. Whilst the Future Fund will undoubtedly be very popular (and, we suspect, quickly oversubscribed) with certain heavily-funded companies which are already backed by supportive institutional investors, the scheme leaves a number of questions unanswered in terms of how the Government is prepared to support the start-up community more broadly.
In a nutshell, only a very limited number of companies will qualify for the scheme in the first place – and for those that do, careful consideration will need to be given as to whether the Future Fund represents a wise source of funds, given its relatively aggressive terms.
With the launch of the scheme, some of our previous questions have now been answered, and we have some further clarity around how the Future Fund will work in practice, including:
- The company must have raised at least £250k in third-party equity subscriptions between 1 April 2015 and 19 April 2020 inclusive.
- Matched funding can be provided by non-UK investors as well as UK investors.
- Applications will take at least 21 days to process, and funds will be paid out to a solicitor's client account (i.e. not directly to the fundraising company).
- The company must be the ultimate parent company of its group (which disqualifies any start-ups with a US parent company, for example, even if this structure was adopted for the purposes of enrolling on a US accelerator programme).
- Applications will need to be made by a Lead Investor (which has invested more than £12,500 in the current qualifying round) and not the company itself.
- The scheme will definitely not be SEIS/EIS compatible (although we understand that (i) there is ongoing lobbying for the introduction of a further scheme that will be SEIS/EIS compatible – which presumably would result in many more start-ups being eligible for Government support, and (ii) the Government has stated its intention that EIS investors who subscribe for convertible loans alongside the Future Fund will not lose their right to previous/future EIS relief, although this has not yet been confirmed).
- The Chancellor has indicated to Parliament that further funds will be made available if the initial £250m is fully allocated. We expect this will happen very quickly, given that 50 companies raising £5m each in matched funding will exhaust the scheme.
- A template convertible loan note agreement has been produced, which will help fundraising companies accelerate the fundraising process and minimise costs. We would expect that the majority of fundraising companies/investors will require some legal support both to ensure compatibility with Future Fund rules, but also in the context of previous fundraising dynamics. This would include negotiating the variable aspects of the convertible loan note, pre-emption rights, board and shareholder authority, and the relationship with any previous convertible loans or advance subscriptions).
Next steps for companies wanting to access the Future Fund
The message is clear: if you want to access the Future Fund, you should move quickly.
Many companies will already be well advanced in agreeing the fundraising round with investors, but given the initial £250m Future Fund pot is likely to be exhausted quickly, and the scheme is "first-come-first-served", it will pay to move fast.
That drawdown of funds will take at least 21 days also indicates that this will not be as quick a source of funds as (for example) the Bounce Back startup loan package, where many companies are reporting that funds are received on the same day as the application is made.
What about start-ups which don't qualify for the Future Fund?
The unfortunate reality is that the Future Fund is only available to a select number of start-ups which satisfy the narrow criteria of the scheme. The majority of our conversations with clients in recent weeks have led to the conclusion that either they don't qualify for the Future Fund (typically because they are founder-funded, have received debt funding rather than equity, or are yet to raise the £250k required to participate), or do not want to subscribe for what is perceived as a last-resort approach to fundraising given its relatively aggressive interest and redemption premium, not to mention lack of S/EIS availability.
We remain hopeful that further Government measures will be introduced to help save the wider UK start-up and scale-up community, but at the moment this remains a hope rather than an indication of whether and when this may happen.
In the meantime, we are working closely to support our start-up and scale-up clients to explore alternative fundraising and operational approaches during these unprecedented times. Please do get in touch if you require support or would like to have a conversation about how we may be able to help.
If you would like to discuss any of the issues raised in this article, or have other concerns about the impact of Coronavirus, please contact Dan Partridge or Harry Trick in Michelmores' Corporate team.
All information correct as of 20 May 2020.
CORONAVIRUS STOP PRESS – Click here to keep-up-to date with all of our latest articles.
This article is for information purposes only and is not a substitute for legal advice and should not be relied upon as such. Please contact our specialist lawyers to discuss any issues you are facing.