The Future Fund provided a financial lifeline to many companies during the coronavirus pandemic but now the reality of giving up shares in your company or repaying a loan with a very high redemption premium is fast becoming a reality.
Contents:
- What is the Future Fund?
- What are the main features of the convertible loans?
- If I do nothing, what happens to the loan?
- If I raise new finance, what happens to the loan?
- If I sell or list my company, what happens to the loan?
- If I take on new lending, what happens to the loan?
- How do I pay the loan back?
- What if I am facing financial difficulties?
- Next Steps
What is the Future Fund?
The Future Fund is a pot of money created by the UK Government to support innovative start-up businesses who needed financial support during the coronavirus pandemic. The fund was aimed at providing support for general working capital purposes to those businesses who could not access existing Government loan schemes, as they were not yet generating revenue or profit. The scheme launched in May 2020 and is managed by the British Business Bank.
The loans issued under the scheme were convertible loans, meaning that they convert into shares in the company on the occurrence of certain events. These are known as conversion events and include new fundraisings, a sale of the company or the maturity of the loan.
What are the main features of the convertible loans?
- loan amounts between £125,000 and £5 million, provided the amount of the loan was matched by private investors.
- certain events trigger conversion of the loan into shares, including new fundraisings, sale of the company and maturity of the loan.
- loan converts into the most senior class of shares in the company.
- lenders receive a 20% discount (unless higher amount agreed) to the price of the shares on conversion.
- interest rate of 8% (unless higher amount agreed) payable on an event of default or a conversion event. Payment can be satisfied in cash or shares.
- maturity of three years.
The loans had a duration of three years and so most of these loans will become repayable or hit trigger dates for conversion this year. We shall look below at the common questions being asked by companies who have these convertible loans which are now reaching maturity.
If I do nothing, what happens to the loan?
If your loan still remains outstanding at the three-year maturity date, then the loan will automatically convert into shares in your company at the conversion price set out in the loan agreement. This is unless the matched investors and/or the Future Fund have specifically requested repayment of the loan in writing (30 business days before the maturity date).
If repayment is requested then the loan will be repayable together with a premium of 100% of the original loan amount (the redemption premium).
If I raise new finance, what happens to the loan?
This will depend on the amount raised as the loan agreement references two types of financing – qualified financing and non-qualified financing and the effect on the loan is different.
- on a qualified financing (a fundraising amount equal to or greater than the total amount of the loans), the loan will automatically convert into shares.
- on a non-qualified financing (a fundraising amount lower than the total amount of the loans but more than 25% of the total loan amount), the loan will convert into shares on the vote of the matched investors who hold more that 50% of the total loan amount (known as the lender majority).
- on a non-qualified financing of equal to or less than 25% of the total loan amount, the loan will convert into shares on the vote of the lender majority and the Future Fund together.
If I sell or list my company, what happens to the loan?
If you decide to sell or list your company, then the loan will either automatically convert into shares or automatically become repayable with the redemption premium depending on which option would give the lenders the highest return.
If I take on new lending, what happens to the loan?
The loan agreement sets out that no lending which takes priority can be taken on except in limited circumstances, including getting the consent of the lenders. If you do take on any further lending which may be on more favourable terms then those more favourable terms will automatically apply to the existing loan.
How do I pay the loan back?
You can’t choose to pay the loan back. If you wanted to do this, you would need the written consent of each lender.
What if I am facing financial difficulties?
If your company is struggling financially, you may trigger an event of default under the loan. Please get in touch with our team as soon as possible if you think this is the case as we can help you comply with any notice requirements under the loan agreement.
The loan will become repayable upon an event of default together with any interest and the redemption premium. It is worth noting that the loans are unsecured loans so any secured lenders would rank ahead of the loan in terms of repayment - our experienced teams will be able to walk you through all aspects of any debt or insolvency concerns you may have.
Next Steps
We understand that in the current economic difficulties, alternative funding options may not be available, may come with a high price tag or may leave little room for negotiation due to the existence of the loan already in place.
Our expert team understand and have experience of these commercial realities and can advise you on what happens next with the loans and options for you and your business if you do need to raise further finance or are considering an exit.
