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With the launch of the UK government’s Future Fund last month, we developed a convertible product to make this co-investment scheme possible for businesses raising on Seedrs.
We’ve already supported a number of eligible businesses to engineer their rounds for the Future Fund, to provide them the flexibility and financing they need to continue focusing on the task at hand. Several campaigns have already had their applications approved.
This guide outlines everything you need to know about the Future Fund, and what it entails for investors on Seedrs.
About the Future Fund
In an effort to support innovative, high-growth businesses through this time, the UK Government has made £250 million available through its Future Fund, to deploy into ambitious UK startups that meet key criteria. Although the fund has currently been capped at £250 million, the scheme is likely to be expanded if demand outpaces this amount.
The Future Fund will match up to 100% of private investment in eligible businesses through these government-issued convertible loans, ranging in value from £125,000 to £5 million. Any eligible business on Seedrs that raises for example £500,000, will receive an additional £500,000 in funding from the Future Fund if the application is successful.
What’s the deal with a convertible loan note?
Simply put, a convertible loan is debt that can be converted into equity. A familiar tool leveraged by venture capitalists, a convertible loan – unlike an equity issuance – gives founders the ability to defer the need to assign a valuation to the business until a later date.
Convertible equity is familiar to Seedrs investors in the form of advance subscription agreements (ASAs). The key differences between a convertible loan and an ASA are that (a) convertible loans will attract interest and (b) there will be certain circumstances in which convertible loans will be repaid rather than be converted into equity. We funded our very first convertible equity raise back in 2014. Six years later, we’ve helped fund over 50 convertible campaigns, all of which converted to equity.
Future Fund capital and private investors alike, will invest into eligible Seedrs businesses on the exact same terms set out in the convertible loan agreement prescribed by the Government.
What are the benefits to investing alongside the Future Fund?
There are several key points that differentiate an investment on the Future Fund convertible loan terms, from a typical equity investment:
While a regular equity investment does not pay interest, the convertible loans provided through the Future Fund will apply a minimum of 8% per annum (non-compounding) interest. Interest on these convertible loans will continue to accrue until conversion or repayment of the principal loan. On a conversion event, the company can choose to repay the interest or convert it to shares (generally without a discount).
- Possibility of repayment
Under the Future Fund convertible loan terms, investors can choose to have the loan repaid with accrued interest and a redemption premium equal to the principal loan amount on certain events, including an exit and on the maturity date.
- Tax relief
Many UK-based equity opportunities on Seedrs provide EIS or SEIS tax relief depending on their stage. However, the Future Fund convertible loan is not EIS-eligible, and because the government requires that private funding match the exact terms of the Future Fund’s investment, private funding in eligible businesses will not be EIS-eligible either. However, for Seedrs investors who have invested in companies in the past that are now applying for the Future Fund, there will be no impact on ability to claim relief on previous investments.
We’ve set out below a comparison of the benefits of S/EIS eligibility vs the Future Fund convertible terms:
How to identify Future Fund opportunities on Seedrs
When browsing live investment opportunities, a Future Fund-eligible campaign is identifiable by its Future Fund logo, and a pink progress bar. The “investment sought” value indicates the target for an eligible campaign, which will be matched by the Future Fund if the application is approved. Many campaigns will be willing to accept a certain amount of overfunding, which may also be matched by Future Fund investment if approved.
What makes a startup eligible for the Future Fund?
It doesn’t matter if a business is disrupting the food and beverage, fintech or property space, if it is the first to apply for funding, and meets the required criteria, it will be the first to receive capital.
Eligibility for Future Fund financing is defined by the following criteria:
- The company must have raised at least £250,000 in equity from third-party investors in previous funding rounds in the last five years
- If a member of a corporate group, it must be the ultimate parent company
- The company does not have any of its shares or other securities listed on a regulated market
- The company must be a UK incorporated limited company, on or before the 31st December 2019
- At least half of employees are UK based OR at least half of revenues are from UK sales
What criteria must investors meet to qualify for the Future Fund?
One of the fundamentals of the Future Fund is that it requires that government funds are matched by private investors. Thanks to our nominee structure, Seedrs invests on behalf of our users and as long as you have been onboarded on our platform, your investment in eligible businesses will qualify for the Future Fund.
How will companies use the proceeds from the Future Fund?
The Future Fund specifies that businesses may not use the funds to repay shareholder debt or pay dividends, bonuses or similar discretionary payments within twelve months of the loan agreement. Therefore, when investing on Seedrs alongside the Future Fund, investors can rest assured that their investment will be used directly and strategically into areas best served to drive interim growth and innovation.
Working toward a fairer, more transparent investment ecosystem
Everyone investing alongside the Future Fund will also be asked to sign the Investing in Women Code, which is aimed to promote diversity within the private equity space, ensuring that all entrepreneurs who show unique potential, regardless of their gender, have access to the resources and capital they need to build the businesses that will shape a credible future for the UK economy.
If you’re thinking of applying for the Future Fund, let us know at [email protected].