This article forms part of our coronavirus resource hub and, in particular, develops on a series of articles on the financial measures introduced by the Government to assist businesses across the UK during these turbulent times.
On 20 April, the Chancellor announced a new £1.25 billion bailout programme for venture capital-backed businesses that are struggling to survive the pandemic, but are not otherwise eligible for the existing coronavirus schemes, including the Coronavirus Business Interruption Loan Scheme (CBILS), the Coronavirus Large Business Interruption Loan Scheme (CLBILS) and the Covid Corporate Financing Facility (CCFF). The package includes:
The £750 million of support will be provided to innovative businesses by Innovate UK and will comprise of the following:
The first payment is expected to be made by mid-May 2020. Guidance on how to apply for a business innovation grant through Innovate UK is available here.
In partnership with the British Business Bank, the Government will initially provide a fund of £250 million, due to launch in May and which will be accessible initially until the end of September 2020. The support will take the form of convertible loans.
This will allow the Government to convert the loans into shares on pre-agreed terms. The convertible loans will range from £125,000 to £5 million per eligible company with an applicable interest rate of a minimum 8% per annum. The loans (if not previously converted) will mature after a maximum three years.
The key terms of the Future Fund are summarised below, together with some factors that companies might want to consider before applying to participate in the scheme. The term sheet is available to view in full here.
Only a company that meets the following conditions will be eligible for support:
For companies that form part of a group, support can only be accessed by the ultimate parent company.
The Government funding can only be used for working capital purposes. It cannot be allocated for bonuses, dividend payments or lending, nor used to satisfy advisory or placement fees or bonuses payable to external advisers in connection with the fundraise.
In common with most funding rounds, the company will be asked to provide the Government with:
The company and existing shareholders will have to concede limited corporate governance rights to the Government during the term of the loan and as a shareholder post-conversion (unless the loan is repaid). What is meant by ‘limited corporate governance rights’ is not yet clear, but the expectation is that a light touch approach will be taken.
The Government will be free to transfer the loan, and any shares issued on conversion of the loan, to any institutional investors that have invested in at least ten companies via the Future Fund, or to entities wholly-owned by central government departments, without restriction.
Under the proposal, the loan will convert into the most senior class of shares on the company’s next qualifying funding round (or if another more senior class of share is issued within six months of conversion, the Government would be further entitled to convert the initial conversion shares into that class). For these purposes, a funding round will be ‘qualifying’ if the company is raising equity capital equal to at least the value of the convertible loan. The loan will convert at a rate calculated by dividing the amount loaned to the company by the price paid by other investors on the qualifying funding round, discounted by 20% (or a higher discount if the company has agreed that with the matching investors). Any accrued interest may either be repaid or converted into shares at the price paid by other investors on the qualifying funding round (ie no discount is applicable on the conversion of interest).
The loan may convert otherwise than on a qualifying funding round, at the election of a majority (by amounts invested) of the matched investors on the next funding round, again with a minimum 20% discount being applied.
The proposed conversion mechanism sets out specific rules for sales, IPOs and the maturity of the loan, involving either conversion at a discounted price or repayment at a premium (being a premium equal to 100% of the principal of the bridge funding).
While start-ups will be encouraged by the Government’s new Future Fund, the following points should be considered before applying for the funding:
Overall, this is a welcome initiative and it is good to see the Government using a well understood funding instrument, in the form of a convertible loan. The terms are not too dissimilar from those available from existing participants in the market and it should combine well with companies’ other funding efforts.
Penningtons Manches Cooper’s corporate team has considerable expertise in relation to debt and equity funding rounds for both start-up and scale-up companies, and is well-placed to advise any businesses looking to participate in the Future Fund.
This article was co-authored by David Kendall, Michael Brown and Olivier Jacquelin.