Just hours after we published an article with everything we knew about the Future Fund, the British Business Bank (BBB) finally launched their official Future Fund webpage. This was shortly followed by a list of FAQs and, just 48 hours later on 20 May, the fund itself went live for applications.

WHAT IS THE FUTURE FUND?

Okay quick recap! The Future Fund, which is available until the end of September, is the Treasury’s latest collab with the British Business Bank to support businesses in the face of COVID-19 disruptions. Pegged as being aimed at “innovative businesses”, the general understanding of the fund is that it’s for UK incorporated startups who have seen the interest of VCs dry up as the world waits in limbo for the crisis to subside.

Unlike the Coronavirus Business Interruption Scheme (CBILS) and the Bounce Back Loan Scheme (BBLS) which deal exclusively with debt funding, the Future Fund will issue convertible loans between £125,000 and £5 million. This bridge funding will then automatically convert to equity at the company’s next eligible funding round.

The catch? To get one of these convertible loans, you must also secure match funding of equal or greater value from a 3rd party investor. So, just as the CBILS and BBLS were set up to encourage lenders to lend, the Future Fund will (hopefully) encourage investors to invest.

How do future fund loans work?

You might see the Future Fund loans referred to as CLAs which stands for conversion loan agreements. A conversion loan is a loan that may convert into equity at a later date.The Future Fund’s convertible loans will have 8% p.a. minimum non-compounding interest, but your investors can agree higher terms with you.

The loans aren’t like regular bank loans that have monthly interest payments. Instead, you either repay the interest when the loan converts or it’s subtracted from the final share value. The loans mature after 36 months and you can’t repay early, unless all investors agree. If you default before then, you’ll have to pay the interest up to that point. Fundraising and exit events can also trigger the loan’s conversion into equity.

Conversion discounts are a way for investors to convert the loan amount, plus interest, at a reduced price. In this case of the Future Fund, the discount percentage is 20% unless you agree higher terms with your investor(s).

Who is eligible for the future fund?

The fund is open to all sectors and the BBB has set out its full eligibility criteria here. In short, you need to:

1. have raised at least £250,000 in equity from 3rd party investors in the last 5 years
2. be unlisted
3. have been a UK incorporated limited company since at least 31 December 2019
4. be the ultimate parent company if you’re part of a corporate group
5. have either half of your employees based in the UK or at least half your revenue coming from UK sales For avoidance of any doubt, you’re not eligible for the fund if you’re a sole trader, partnership, LLP or unincorporated body.

How do businesses apply for the future fund?

In a surprise twist, the short answer to this question is that business can’t actually apply for the Future Fund. The BBB’s Future Fund portal is open to applications from investors only, so startups themselves won’t be in charge of the process.

Just one lead investor is allowed to apply on behalf of a business, as long as they’re investing at least £12,500. They don’t need to be the largest investor but they do need information on any other investors, along with information on the startup itself. You’ll also need to make sure they have full shareholder consent.

As the ‘Investee Company’ director, you’ll need to set up your own account on the Future Fund portal. This is, among other things, so you can submit the same company information you send to current shareholders, along with documents that the BBB can use to make general fraud checks and verify your company status.

Check out the BBB’s FAQs for companies for all the information you’ll need to set up a Future Fund portal account. There’s a lot to provide including your turnover and ownership structure chart or supporting documents that show all ultimate and intermediary beneficial owners of 25% or more of the business. If your application is successful, you’ll need to submit information quarterly so the Future Fund can monitor its portfolio.

Now take a seat because here’s the kicker: it will take at least 21 days to get the funds. Of course the faster you submit information for KYC and AML checks, the speedier the process is likely to be, but you probably shouldn’t plan on using your Future Fund loan anytime soon.

Who can invest in the future fund?

Any private investor can provide match funding under the Future Fund as well as VCs and corporate investors, which don’t need to be UK-based. You can have up to 147 investors without having to produce a prospectus. There’s an exemption in Prospectus Regulation for companies of fewer than 150 investors and, because the Future Fund and your lead investor count as two, you need to cap your other investors at 147. You’ll have to find your investors yourself though: the BBB won’t match make.

The same person can be a lead or regular investor in any number of startups and can apply on behalf of all of them as long as they submit separate applications for each. But – and this is a big but – individual investors can’t claim EIS (Enterprise Investment Scheme) or SEIS (Seed Enterprise Investment Scheme) because of restrictions on State Aid. Both of these schemes provide tax relief to private investors.

UK law firm, Goodwin, published a selection of useful Future Fund resources this week which includes information about the ineligibility of the EIS and SEIS. To summarise, Goodwin explains that startups don’t necessarily need to worry if they had EIS or SEIS investors in earlier funding rounds. The BBB has said that the government will amend the rules when the Future Fund loan is repaid to confirm that this is compatible with any previous EIS or SEIS investments.

So that’s what we know. What we don’t know yet is whether having a Future Fund loan will have an impact on future EIS or SEIS investments. We also can’t say whether these loans will be compatible with Venture Capital Trust (VCT) reliefs although the assumption here is that they probably won’t be.

What’s wrong with the future fund?

Let’s take a minute to talk about some of the ways the Future Fund has, and will likely be, criticised by both investors and the UK startup community. We covered some of these earlier this week, but here are the main things to be aware of.

There’s a 100% redemption premium

The government’s investment in your business under the Future Fund is structured as a convertible loan note. In other words, an interest bearing loan that can either be converted to equity or be repaid. Chances are you’ll want to go with the conversion option though because repayment comes with a whopping 100% redemption premium.

Most businesses will likely follow the standard Future Fund procedure in which their loan automatically converts to equity at the next eligible funding round. Even if you decide to sell your business or IPO, the Future Fund loan can still convert to equity (at a minimum discount of 20% to the most recent non-qualifying funding round). Still with us? Here’s where things get a bit murky.

In the case of a sale or IPO however, the government’s headline terms state that – if it provides the lender with a better return than converting to equity – you’ll have to repay the loan with a 100% redemption premium. In other words, double what you borrowed plus interest.

We’ll repeat that because it’s important: if you sell or IPO before your next eligible funding round, you could be forced to pay back double what you borrowed plus interest. You may also find yourself in a similar situation if the term of your Future Fund loan expires before your next eligible funding round.

The application process is neither fast nor flexible

The BBB has been clear that it’s going to process applications on a first come, first served basis. The size of your loan request won’t make any difference and there aren’t multiple streams of the Future Fund, so don’t waste time dreaming up the most likely figure that might get approved.

If an investor completes multiple applications for different businesses on the same day, the BBB will only look at one. This means it’ll take a few days to go through the various businesses of that particular investor. Remember, you’re still looking at another 21 days of waiting as a guaranteed part of the application process.

Okay, so maybe we’re being a bit unfair. This criticism is also an upside if you look at it from the other side of the coin. Being strict about processing applications in the order they come in will go a long way to combat privileged access from more advanced investors associated with larger startups. There have been fears that businesses with better investor relationships and a proven financial track record might end up monopolising the fund, so this should in theory help smaller startups who can’t mobilise as quickly.

Only 25% of UK startups are likely to benefit from the Future Fund

At least, this is the number that’s being thrown around in the media and over Zoom by skeptical members of the startup community. The argument for why three quarters of UK startups won’t be able to access the fund comes down to two main criticisms.

It excludes many US accelerator programme graduates

A group of 32 CEOs including Thread’s Kieran O’Neill and Hiroki Takeuchi of GoCardless wrote an open letter asking the Treasury to remove the requirement that the startup’s parent company be based in the UK. This was to avoid startups who have graduated from US accelerator programmes being excluded from the fund.

US accelerator programmes such as Y Combinator and TechStars for example have provided an invaluable leg up to hundreds of successful UK startups. Although it isn’t always a hard and fast rule, accelerator programmes like these can require startups to register a parent company in the US, which means they’re not eligible for the Future Fund.

It excludes angel investors

Remember, the Future Fund is not compatible with the EIS or SEIS. With 86% of angel investors relying on these tax breaks to reduce investment risk and allow them to invest in smaller startups, it’s unlikely that angel investors will have the appetite to put up the match funding essential for the fund. This not only excludes most angel investors from the Future Fund but also the businesses that rely on their support.

When should you apply for the future fund?

Given the number of startups in the UK (around 30,000), the Future Fund could dry up pretty quickly. Rishi Sunak has pledged to extend the scheme ‘should applications exceed the initial £250 million and it seems likely that he’ll need to. Our advice? Don’t delay if you want to access the fund.

There is, however, a lot of fine print and you should make sure you’ve done all of your research (and hired a team of experts to help) before even thinking about getting involved with the Future Fund. Here are a few points we haven’t mentioned yet that you may find useful:

• You can’t use a Future Fund loan to repay debt, pay dividends/bonuses or to pay advisory fees
• You’re still eligible to apply for a Future Fund loan even if you’ve already applied for funding under the CBILS or BBLS
• The Future Fund won’t have any effect on your R&D tax credits

And here’s a recap of all the resources covered in this article that could help ease you through the application process:

• The British Business Bank’s official Future Fund webpage
• The British Business Bank’s FAQs For Companies
• The British Business Bank’s Future Fund portal
• The government’s Future Fund headline terms
• Goodwin’s selection of useful Future Fund resources
• The British Business Bank’s official CBILS webpage
• The British Business Bank’s official BBLS webpage

If you have any questions about the scheme you can also email FutureFundSupport@british-business-bank.co.uk or call the Future Fund Support Team on 0330 726 0230.