Conversion of your Future Fund loan
Preparing for and understanding your Future Fund loan conversion.
The Future Fund
The Future Fund was introduced by the UK Government to provide support to innovative companies facing financial difficulty as a result of the Covid-19 pandemic and allowed qualifying companies to apply for a convertible loan for between £125,000 and £5 million from the Government to help fund business growth and innovation provided the loan was matched by loans from private investors. The scheme closed in March this year and we are already seeing a number of companies have
What triggers conversion?
- Qualifying Financing: this is where when the company raises in through the fresh issue of shares an amount that equal to or greater than the amount of the Future Fund loans.
- Non-Qualifying Financing: Where shares are issued to new investors but the value is below the amount of the Future Fund loans then a majority of the lenders (excluding the Future Fund) can elect for the loans to be converted. If the financing is for less than 25% of the Future Fund loans then the Future Fund must also consent to the conversion.
- Exit: on a sale or listing of the company the loan will automatically convert into shares provided the lenders will receive on sale at least 200% of the amount of their original loan and the purchase price for their converted shares is cash. Where the consideration contains non-cash elements the lenders can choose where to convert or be repaid their loan and the 100% redemption premium.
- Maturity: after three years the loan will automatically convert unless the lenders elect to be repaid their loan and the 100% redemption premium.
What do you need to do ahead of a conversion event?
- Notice: the company needs to give the Future Fund and other lenders at least 20 business days’ notice of a financing round or exit. Notwithstanding this we strongly recommend companies notify the lenders of a potential conversion event as far in advance as possible because the Future Fund are dealing with a large number of conversions and agreeing the conversion documentation with the Future Fund can therefore impact on the proposed timetable.
- Agree the conversion numbers: The number of shares to be issued to the Future Fund and other lenders will need to be agreed and the company needs to decide whether the accrued interest should be paid or converted into shares. The conversion of the original loan amounts is at the agreed discounted rate (typically 20%) whereas interest converts at the applicable fundraising round price.
- Future Fund shareholder terms: The Future Fund loan agreement expressly provides for certain rights to continue once it is a shareholder. Notwithstanding this the Future Fund requires that they be incorporated into a new shareholders’ agreement or specific agreement between the company and the Future Fund. These rights include repeating certain warranties given in the loan agreement, continuing to comply with various undertakings (in particular the quarterly information rights of the Future Fund) and an “anti-embarrassment” right to convert their shares into a different class should a subsequent fundraising within six months involve the issue of shares having preferential rights to those issued to the Future Fund.
- Changes to your articles of association: the Future Fund needs the right to be able to transfer its shares freely to certain permitted transferees and this needs to be incorporated into the company’s articles of association.
We’re here to help
We have advised a number of companies and investors on their Future Fund loans and subsequent conversions. If you have any questions about converting Future Fund loans or equity fundraisings more generally, please contact Penelope Garden on 07584 216062 or at [email protected].