The pumps turn on for early stage UK tech: government announces £1 billion pound support package

This morning the UK government has promised to make available a cool £1 billion in support to high-growth private companies.

The UK is not the first to do so, France and Germany have already introduced similar schemes.  And the Save Our Startups lobby group has been calling for this kind of support – HLaw were signatories to their petition.

Some would say that the UK government has finally thought about supporting a key part of the economy that will be leading the UK out of the coronavirus-shaped hole which as yet has no bottom.

Others will worry that the funds will be propping up zombie start-ups whose well-heeled VC-backers have declined to support them.

Either way, it looks as though the support will be made available and it looks as though UK plc could well end up with an equity stake in a swathe of early stage technology ventures in the years to come.

The support is to be split as follows:

• £250 million pledged to a £500m ‘Future Fund’ to invest in high-growth private companies, with the other half to be provided by the private sector; and
• £750 million in Innovate UK grants and loans to small and medium-sized companies focussing on research and development.

The Future Fund will it seems:

• be delivered in partnership with the British Business Bank;
• launch in May 2020;
• invest cheque sizes between £125,000 and £5 million in (50% max) matched funding from private (matched) investors; and
• only invest in businesses that have already raised an equity cheque of at least £250,000 within the last five years.

It will invest using convertible loan notes, a favourite subject for HLaw Insight pieces – see here, here and here.

The headline terms will – it appears at time of writing – be as follows:

• proceeds to be used only for working capital and not repaying debts or making dividends or making bonus payments to staff and so on;
• interest on the debt prior to conversion of at least 8% non-compounding (or higher if that is what the matched investors are benefitting from);
• the discount on conversion will be a minimum of 20% or a higher rate if that is what the matched investors are benefitting from;
• there will be no valuation cap;
• the debt will be repayable if there is no qualifying funding round within three years;
• there is a 100% redemption premium payable on repayment of the debt – i.e. a 2x return plus the interest for the government if the debt is repaid;
• the debt will be unsecured, although query what happens if the matched investors have security – presumably in that case the government would look to be equivalently positioned;
• the terms include a negative pledge not to create more senior debt;
• inclusion of a ‘most favoured nation’ clause so that the terms will be enhanced to match any more favourable terms granted to any other investor for the life of the debt / prior to conversion;
• warranties to be given by the investee company, including on solvency which could be interesting for some companies; and
• the government can transfer the loan and any shares issued on conversion to an institutional investor (which is itself acquiring interests in at least ten Future Fund companies).

No doubt there will be further red tape to come in due course and it remains to be seen how much of this will be compatible with companies seeking to close EIS and VCT rounds.  We at HLaw will be following developments with great interest.

This piece was prepared by Henry Humphreys and Lucy Ganbold, and do reach out to either of them if you have questions on the scheme or on convertible notes.

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Humphreys Law