UK Government Announces Funding for Innovative Companies, New COVID-19 Future Fund

The UK government has announced two new schemes for funding to innovative companies and startups, launching in May 2020.

After certain businesses advised that they were unable to access previously announced government support measures as a result of being either pre-revenue or pre-profit, the UK government announced new schemes to demonstrate its commitment to supporting businesses during the coronavirus (COVID-19) pandemic, and, in particular, the importance of the innovative and startup sectors to the UK economy.

Innovate UK

An additional £750 million (approx. $933 million) of funding will be available from Innovate UK (the UK’s innovation agency) to small and medium-sized enterprises (SMEs) that focus on research and development.

The funding includes the acceleration of loans and grants to existing Innovate UK customers, as well as additional funding for both existing customers of Innovate UK and businesses that are not yet receiving funds from Innovate UK. Innovate UK has offered £175,000 (approx. $218,000) of support to 1,200 businesses that are not already receiving its funds (totaling £210 million (approx. $261 million)).

The funding will be made available through Innovate UK’s existing loan and grants scheme. Additional details are expected to be announced in early May when the scheme is set to launch.

Existing customers of Innovate UK are encouraged to reach out to their contacts at Innovate UK for further details, while businesses that are not yet customers of Innovate UK can find more information about how to apply on the Innovate UK website.

Future Fund

A new scheme, the Future Fund, will issue convertible loans to startups facing financing difficulties as a result of COVID-19. The scheme will initially make available up to £250 million (approx. $311 million), with full details regarding eligibility and terms to be published shortly. Certain key terms have been released, including the following:

• Eligibility. Qualifying companies will (1) be an unlisted UK registered company; (2) have at least £250,000 in third-party equity investments over the preceding five years; and (3) have a substantive economic presence in the United Kingdom. If part of a group, the qualifying company must be the ultimate parent company.
• Loan size. The government’s funding shall be for a facility of between £125,000 (approx. $156,000) and £5 million (approx. $6.2 million), for a term of up to three years.
• Matched funding. The government’s unsecured funding must be, at least, matched by other third-party investments. However, there is no limit on the amount that can be invested by third parties.
• Interest. The interest rate shall be a minimum of 8% per annum, but higher if agreed between the company and the matched investors.
• Use of proceeds. The funding is to be strictly limited to working capital purposes and shall not be used for any debt repayments, distributions, bonus payments, advisory or placement fees, or any bonuses to external advisors.
• Covenants. The government’s loan will include limited covenants, which will focus on ensuring that investors and the government are treated fairly and equally, and, in particular, that the government receives as much information as third-party investors.
• Conversion. The loan will convert into equity (1) at a discount of 20% to the next funding round, provided that round is at least equal to the bridge funding; (2) at a funding round that is less than the bridge funding, if a majority of the private investors that the government matched choose to convert (also at a discount of 20% to the funding round); and (3) on a sale or initial public offering, the funding will convert at the price of the most recent funding round (including the discount), or be repaid without a discount.
• Most favoured nation. The government loan will include a most favoured nation clause. This stipulates that if any additional convertible loans are issued on more favourable terms, those terms shall also apply to the government’s loan.
• Negative pledge. Companies will be prevented from creating additional indebtedness senior to the funding, except bona fide senior indebtedness from a party that is not an investor at the time of the government’s loan.
• Transfer rights. The government will be entitled to transfer the loan, or converted equity, to any institutional investor that is acquiring the government’s interest in at least 10 companies in which the government invested through the Future Fund. The government will also be able to transfer its interest to other governmental departments or entities, or other entities that are wholly owned by the government.

The Future Fund is therefore aimed at businesses that have already received venture capital or angel investor funding and may not otherwise be eligible for funding under the UK government’s other COVID-19 support measures.

Businesses will be able to access further information once the scheme is launched from this webpage.

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Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

London
Nicholas Moore
Jack Shawdon