The Government has made £250 million available for the Future Fund. Due to the popularity of the Fund, more funding has been made available, with around £320 million having been now invested in more than 320 startup companies. The scale of the scheme will be kept under review.
The overriding principle of the Future Fund is to double the startup’s or SME’s ability to attract capital. Every new private investment between May and September 2020 will be complemented by the same amount by the State in the form of convertible loans. The application for the available funding of the Future Fund is investor-led process throughout the dedicated online platform.
The criteria of application are the following:
- The company must have raised at least £250,000 in equity from third-party investors in previous funding rounds in the last five years (1 April 2015 – 19 April 2019), excluding secondary market transactions,
- The company must be a UK incorporated limited company, on or before the 31st December 2019,
The loan amount is min £125.000 – max. £5.000.000, i.e. at least £125.000 is invested throughout this investment round, including the investment of the lead investor in the value of at least £12.500. The lead investor can be either an individual or an institution. The investment might be provided either by private, angel venture capital investment or by crowdfunding,
- The company does not have any of its shares or other securities listed on a regulated market,
- At least half of employees are UK based OR at least half of revenues are from UK sales.
The program offers several benefits for crowd investors, as opposed to typical equity investment.
- The convertible loans provided through the Future Fund will apply a minimum of 8% per annum interest. Interest on these convertible loans will continue to accrue until conversion or repayment of the principal loan. The maturity of the loan is 3 years. A conversion event can be either maturity, a qualified investment round or exit. On a conversion event, the company can choose to repay the interest to investors or convert it to shares.
- Investors can choose to have the loan repaid with accrued interest and a redemption premium equal to the principal loan amount.
This is not the only startup investment scheme offered by the British government. The Enterprise Investment Scheme (EIS) has been available for years, supporting investors by tax relief. The following table compares the Future Fund and the EIS schemes.
In order to disburse the requested loan amount the Convertible Loan Agreement (CLA) must be signed by the company, the investor(s) and UK FF Nominees Limited representing the Future Fund.
Based on the CLA the use of funds is restricted by the Future Fund according to the following measures: (a) repay any borrowings from a shareholder; (b) pay any dividends or other distributions; (c) pay any advisory or placement fees or bonuses to any corporate finance entity or investment bank within 12 months from the date to sign CLA.
Many UK-based equity opportunities provide EIS (Enterprise Investment Scheme) or SEIS (Seed Enterprise Investment Scheme) tax relief with the aim to convert cash-in-hand to investments.
Enterprise Investment Scheme (EIS) is designed to encourage investment in early-stage growth-focused companies by providing investors with up to 30% of their investment back in income tax relief. Any gain is Capital Gains Tax free if the shares are held for at least three years. Loss relief can also be set against an investor’s Capital Gains Tax or income tax.
Seed Enterprise Investment Scheme (SEIS) aims to encourage investment in new seed-stage companies by providing individuals with income tax relief at a rate of 50% on the value of the investment, with a maximum of £100,000. Investors can also benefit from up to 50% Capital Gains Tax relief (up to a maximum of £50,000) on gains which are reinvested in EIS eligible shares. Any gain arising on the disposal of the shares may also be exempt from Capital Gains Tax if the shares are held for three years, and loss relief is also accessible if the investment fails.
The Future Fund convertible loan is not EIS-eligible but the scheme provided by the Future Fund is exceptional even without the above described relief.