Heeding calls from a huge cross-section of the UK start-up ecosystem and the British Venture Capital Association, the Government has announced a £1.25 billion Coronavirus relief package for startups, launching in May.
The package comprises the Future Fund, a £500 million convertible loan programme for bridge funding, to be deployed by the British Business Bank with participation from private investors, together with £750 million of support for R&D intensive growth companies through Innovate UK’s grants and loan scheme.
Of the Innovate UK funding, £550m will be available to companies with existing Innovate UK loans and grants and £175,000 to new “customers”, with the Government aiming to deploy the first payments in mid-May. Innovate UK will also accelerate up to £200m of payments under existing grants and loan for companies which opt-in.
Convertible loans for working capital under the Future Fund scheme, which will initially be open until the end of September 2020, will be available to unlisted UK-registered companies that have raised at least £250,000 from private investors in the last five years. The full eligibility criteria is yet to be published.
The Government’s participation in any one loan is capped at 50%, with minimum of £150,000 and a maximum of £5million coming the Government - the total loan amount is not subject to any cap so companies are free to raise more from private investors.
The outline terms for the loan facility published by the Government provide that the loan will have a 3-year term, bearing interest at 8%, converting automatically into equity at the company’s next funding round of the same size of the loan or greater (or by election of the Government and matching investors on a smaller funding round or maturity) at a minimum 20% discount to the next round price.
The Government is also seeking a number of terms not commonly included typical private sector convertible loans, such as a most favoured nation provision giving the Government and the matched investors the benefit of any more favourable terms subsequently agreed by the recipient company with convertible debt investors, as well as the right to transfer its loan holdings (and any shares they convert into) to any institutional investors seeking to purchase a portfolio the Government’s equity and debt holdings in start-ups.
The latter will be reassuring to taxpayers as it shows the Government is thinking ahead to exiting its positions by creating a secondary market for stakes acquired under the Future Fund. Institutional investors will also not doubt be looking ahead to that opportunity with interest.
There are still a few details be ironed out with the loan terms. For example, while the Government’s outline terms state that the Government’s participation in the loan is unsecured, will they also require matching investors not to take security (as we have seen with Coronavirus Business Interruption Loan Scheme, the banks’ security requirements initially proved an obstacle to deployment). Additionally, where the loan is converted into equity, will the 8% interest also convert? This is typically a negotiation point on private sector convertibles.
Growth companies seeking funding under the Future Fund scheme should be aware that the entry into a convertible loan is likely to be subject to its existing shareholders' rights of pre-emption under the Companies Act 2006 or the company's governing documents, as well as potentially investor or shareholder consent under any shareholders' or investment agreement in force in relation to the company. Where this applies, companies should use this time before the scheme launches in May to speak to shareholders to get the necessary waivers or consents in place so they can move quickly when the scheme launches.
Delivered in partnership with the British Business Bank and launching in May, the fund will provide UK-based companies with between £125,000 and £5m from the government, with private investors at least matching the government commitment. These loans will convert to equity if not repaid. 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.