Future Fund Scheme

The uncertainty brought on by the COVID-19 pandemic, which in turn resulted in a corresponding economic downturn, has had a serious detrimental effect on many businesses across the country. This state of affairs led to the introduction of a series of financial measures by the UK Government with the aim of helping businesses to survive through this current period of economic disruption. One of these key financial support mechanisms is the Future Fund scheme which helps innovative UK companies to continue their pre COVID-19 growth and reach their full potential during these uncertain times.

The scheme

The Future Fund scheme (which is effectively run by the British Business Bank) provides financial support via the issue of convertible loans in sums ranging from £125,000 to £5 million, where the investee company is able to raise at least equal matched funding from private investors. The scheme, which remains open to applications until 31 January 2021 is specifically designed for innovative UK companies that typically rely on equity investment.

Eligibility criteria

In order to be eligible to participate in the scheme, the investee company must satisfy all of the following conditions:

  • it must be incorporated in the UK. If the investee company is part of a larger corporate group, then only the parent company would be eligible to participate in the scheme;
  • the investee company should have raised at least £250,000 in equity investment from third-party investors in the last five years;
  • none of the investee company’s shares can be traded on a regulated market such as the Main Market of the London Stock Exchange or on the AIM;
  • the investee company must have been incorporated on or before 31 December 2019; and
  • at least one of the following conditions is met:
    • half or more of the investee company’s employees are UK-based; or
    • half or more of the investee company’s revenues are generated from sales in the UK.

How the funds can be used?

The investee company must bear in mind that there are some restrictions on the way in which the convertible loan proceeds borrowed under the Future Fund scheme can be used including:

  • restrictions on the repayment of any existing borrowings from a shareholder or a shareholder related party (other than the repayment of any borrowings to any bank or venture debt facilities);
  • restrictions on the payment of dividends or other distributions to shareholders out of the convertible loan proceeds;
  • restrictions on the payment of bonuses or other discretionary payments to any employee, consultant or director of the investee company for a period of twelve months from the date of the Future Fund loan (with the exception that such a payment can be made if the relevant employment / service contract pre-dates the entry of the investee company into the convertible loan agreement); and
  • a prohibition on the investee company using any of the convertible loan proceeds to pay any advisory or placement fees connected with the fundraising.


As part of the Future Fund scheme, the investee company (and the private investors) would be required to enter into a standard non-negotiable convertible loan note agreement (CLA) which would set out the key commercial and legal terms of the loans including the rules surrounding their repayment and their conversion into equity.

In addition, a director of the investee company would be required to sign a director’s certificate to confirm (amongst other matters) that the investee company obtained all the relevant corporate resolutions, consents and/or waivers (if applicable) from its shareholders and lenders to permit it to enter into the CLA and to issue the future shares in the event that the conversion mechanism is subsequently triggered.

Key terms of the CLA

As expected, the key terms of the CLA surround the repayment and conversion mechanics of the loans and these can be summarised as follows:

Equity conversion mechanics

Under the CLA, the convertible loans provided by the Future Fund (and by the private investor(s)) will convert into shares in the capital of the investee company on the following events:

  • On a fundraising:
    • automatically on a ‘qualifying fundraising’ event, being a fundraising of new shares of the investee company which raises at least as much capital as the aggregate convertible loan amount under the CLA; or
    • at the election of a majority of the holders of the convertible loans, on a ‘non-qualifying fundraising’, being a fundraising of new shares in the investee company which is for a lesser sum than the aggregate amount of the convertible loans provided under the CLA.
  • On a sale or initial public offering (IPO), automatically if conversion would deliver greater value to the lenders than repayment of the loan with a 100% premium on the principal loan amount.
  • On maturity (i.e. within 36 months), at the election of a majority of the matched private investors and, in respect of the Future Fund, by default unless the Government requests repayment rather than conversion.

Equity conversion price

Unless a valuation cap has been included in the CLA, the price at which the convertible loans under the CLA will convert into shares will be calculated as follows:

  • On a fundraising (whether qualified or non-qualified), the principal amount of the loan will convert into shares in the investee company at a discount of 20% to that funding round price or at a deeper discount in accordance with any such discount that has been provided to private investors.
  • On a sale, an IPO or on the maturity date, the principal amount of the loan will convert at a discount of 20% to the most recent non-qualifying funding round, or deeper in line with any discount provided to the private investors. However, no discount will apply if the most recent non-qualifying funding round took place before 20 April 2020.

On any conversion of the loans, the investee company can elect to either repay the accrued interest in cash or have it converted into shares. In the event that interest is converted into shares, it will do so without applying any discount to the applicable price. The applicable interest rate under the CLA shall be no less than 8% (non-compounding) per annum, but this could be even higher if that has been agreed between the investee company and the matched investors prior to the completion of the CLA.

Repayment of the convertible loans

Where the loan is not converted into shares in the investee company, it will become repayable as follows:

  • On a sale or IPO, the loan will be automatically repayable in cash, if repayment of the loan with a 100% premium on the principal sum would deliver a higher value to lenders than conversion of the loan into shares in the investee company.
  • On maturity (being 36 months after the provision of the funding), the loan will be repayable in cash at the option of a majority of the matched private investor loan noteholders, with a 100% premium on the principal sum plus accrued interest provided that, in respect of the loan provided by the Future Fund, the loan will convert into shares as a default unless the Government requests repayment in cash.

Frustratingly, there is no early repayment mechanism under the CLA meaning that the investee company must appreciate that the most feasible outcome from participating in the scheme would be the conversion of the loans into shares in the company.

Other provisions

The CLA also include various corporate governance provisions that require the investee company to undertake to the Future Fund to treat the Future Fund in a fair and equal manner and provide it with the same information rights that the other investors in the company are entitled to receive. Likewise, the investee company will provide various warranties under the CLA in respect of its capacity to enter into the CLA, its compliance with the Future Fund scheme criteria and its solvency on completion of the CLA.

How we can help?

If your business is considering applying for the Future Fund scheme, then please do get in touch.

Teacher Stern has extensive experience in assisting clients throughout the Future Fund application process including advice and guidance on the scheme’s conditions and its associated documents. We can also assist your business to draft the corporate ancillary documents required to implement the overall transaction and deal with the completion process and the release of the convertible loan monies following the completion of the CLA.

If you have any questions regarding the Future Fund scheme or require further advice in relation to this article, then please contact        Tom Ginot in our Corporate and Commercial team.