Victoria Price: How the Covid-19 Future Fund can help start-ups

The Future Fund was recently launched to help start-ups affected by the pandemic. Who can apply and how?


What is the Future Fund?

The £500m Future Fund, which launched on 20 May, will issue convertible loans to start-ups that are facing financial difficulties in the current Covid-19 environment.

The convertible loans will be provided by the government through the British Business Bank to eligible UK-based companies and these will be matched by funding from private third-party investors. The loans can range from £125,000 to £5m and the scheme is currently open until September 2020.

What is the application process?

Investors have to initiate the application process for start-ups via an online portal. Start-ups cannot apply.

If they have multiple investors, they will need to appoint a lead investor to submit the application for them. The lead investor will also need to have details of any other investors and on the company itself.

The lead investor must be investing at least £12,500 – however, they do not necessarily have to be investing the largest amount. According to the British Business Bank, once applications are submitted, they are assessed and funding is allocated on a ‘first come, first served’ basis.

Who is eligible?

There are eligibility requirements for both the investor and the company. The Future Fund is available to UK-based firms that have previously raised at least £250,000 in equity investment from third parties in the last five years. They will also need to have half or more of their employees based in the UK or generate at least half of their revenue through UK sales.

If they have secured private match funding, one of their investors will be able to start the application process.

Any private investor, UK or non-UK based, can be eligible – they can be an individual, venture capitalist or a corporate investor.

What conversations should entrepreneurs and start-ups be having with their investors?

Companies should look at whether they meet the criteria in the first instance as a corporate. If they do, they should then raise awareness with their pool of investors that they are eligible and highlight the scheme as a way for them to invest in the business in the current climate.

Entrepreneurs should be clear this is not equity and that the convertible loan is not compatible with the Enterprise Investment Scheme (EIS). Participating in the Future Fund may result in an investor losing EIS entitlements on future equity investments.

What should businesses that have not taken a convertible loan before be aware of?

Convertible loans are short-term loans that convert to equity, usually at a discounted rate. The loans from this scheme in particular have an interest rate of a minimum 8% a year and will mature after a maximum of three years.

The conversion process, which occurs during the loan maturity period, is one of the key differences between a convertible loan and other sources of finance such as, for example, a bank loan – a bank loan remains debt unless you proactively do something about it.

Convertible loans can be an attractive option as there is no erosion of equity. The disadvantage is that they can be complex compared with other financing options and there are legal and accounting fees as part of the process. Cash from the Future Fund scheme cannot be used to pay these fees so other sources of funding may need to be considered.

Businesses also need to ensure they understand the terms of valuation for when the loans converts into equity, and what will trigger this. For the Future Fund, the loan will automatically convert into equity in the company’s next fundraising round where the amount raised is at least equal to the aggregate bridge funding.

How quickly can businesses expect to receive capital?

This can depend on how long the process takes to complete and how quickly investors and start-ups get the application completed. The expectation is that funding should be awarded a minimum of 21 days from the initial application.

The fund is not compatible with the Seed EIS and EIS vehicles, so what does this mean in practice?

The EIS and Seed EIS (SEIS) are two of four available venture capital schemes that allow investors who inject cash into early-stage businesses to do so in a way that is tax-efficient for them.

The Future Fund scheme is not compatible with the existing EIS and SEIS regimes. Following conversion of the loan, an investor will not be entitled to make any further EIS investments in the company. If a company has an investor where the EIS status is important, they are unlikely to be interested in participating in the Future Fund.

Can a business apply to the Future Fund if they have already received other types of Government aid related to COVID-19?

The government has introduced a range of broad measures including the Coronavirus Job Retention Scheme and business rate relief. Applying to the Future Fund will not impact any ability to tap into these pockets of support.

Victoria Price is a UK&I private client services leader at EY and leads the group’s Entrepreneur of the Year programme in the North


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