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Future Fund: Help for start-ups, but not all start-ups!

Future Fund has been proposed by the Government as a means of providing cash to innovative UK start-ups, a group which have so far been unable to obtain funding from other schemes such as CBILS.

The proposed terms of Future Fund may not, however, have widespread appeal and many start-ups will continue to fall short of the qualifying criteria, therefore left wondering where to turn next.

In order to qualify, companies must self-certify that they satisfy the eligibility criteria and: 

  1. be unlisted and incorporated in the UK (and have been incorporated prior to 31 December 2019); 
  2. have previously raised at least £250,000 over the past five years; and 
  3. have a substantive economic presence in the UK (either at least half of revenue or employees must be domestic).

Future Fund will provide matched funding on a convertible loan note basis with a minimum amount of external funding of £125,000 (i.e. a minimum loan of £250,000 in total). While the amount of external funding is not limited, the maximum amount, that Future Fund will match, will be £5 million. Use of these funds, however, will be restricted to working capital purposes only and will be expressly prohibited from being used to pay dividends or repay external debt. Arguably, companies who qualify may not be the companies most in need of immediate assistance.

What is a convertible loan? 

Unlike an equity investment such as that of a share issue, there is not a requirement to value the company at the point of issue. It is a debt instrument which is designed to convert to equity, notwithstanding at a discount to market rate, during the next funding round. Until such point where the loan is converted to equity, interest will accrue at a rate of at least 8% per annum.

Where existing investors are able to contribute to the matched funding, they will share in the conversion discount which in turn will avoid dilution of their holdings. The attractiveness of the scheme to existing investors will therefore depend in large on whether existing investors have confidence in, and are willing to participate in, the scheme.

Future Fund utilises a standard form convertible loan agreement (available from gov.uk) which has a fixed maturity date of 36 months from the date of the loan. This contains a number of key restrictions on the company which need to be considered against the current investment structure of the company.

It is essential that any company considering the scheme reviews their current articles of association and shareholder/investment agreement to understand the consent requirements to be obtained from, and to negotiate the commercial effect of the funding with, existing shareholders and investors. 

Future Fund does seem an interesting proposition for companies contemplating bridging financing – particularly where the matched funding can be provided by existing investors. However, many start-ups will have failed to have previously raised the funds of £250,000 and therefore will need to explore alternative options. 

If you are seeking further investment or would like to discuss any of the topics covered by this article please do get in touch with Adam Kean at BPE Solicitors LLP or James Whittaker at Hazlewoods LLP.


These notes have been prepared for the purpose of an article only. They should not be regarded as a substitute for taking legal advice.

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