The UK government is finalising Future Fund, a £250M package designed to help UK startups.
We think the current scheme has a major design flaw, it’s not compatible with SEIS/EIS, and so it won’t be useful for most early-stage startups.
But, problems with the fund aside, we put together the definitive guide. We’ll help you check if your company qualifies, and if it does, what you should do right now to get to the front of the queue so that when the doors open you’re in first, before the money runs out.
We’ll also describe how the scheme works… at least our best guess at how it will, since nobody seems to know for sure, and it’s still changing.
1. Check your company qualifies
To qualify for Future Fund investment:
Your company must have raised £250K or more already.
There have been reports that previous funding must have been from VCs, but we see no evidence for that, our reading of the scheme is that any investment (crowdfunding, angel investments, VCs) all counts.
You must be able to raise at least £125K in investment yourself.
Future Fund will then match that, i.e. to give you double that amount in total.
Importantly, because Future Fund is not currently SEIS/EIS compatible (we’re lobbying to change that!), you’ll need to find VC investors (they mostly don’t get SEIS/EIS) or persuade angel investors to forego SEIS/EIS for this round and (because of the way SEIS/EIS works) for all future investment that they make in your company.
- For more information, see our somewhat scathing review of the fund.
- Take our survey, the results will be fed back to the government to make the fund better fit its intended audience.
Whatever you do, don’t hold off any plans that are currently in place to raise investment or change direction on your current funding efforts until you’re sure that your company can benefit from the fund. If so, keep reading…
2. Step-by-step guide to applying and getting money from Future Fund
There’ve been lots of articles on the fund’s promises, but almost nothing on the mechanics of how it will work, so here’s our breakdown of the mechanics.
Note that the Future Fund details are still being worked out, and we haven’t come across anyone who knows how it will actually work, so this is our best guess, we’ll keep updating it as we learn more.
- Self-check that you qualify, e.g. per the information in this article.
- Go out and find investors (you should get started on that right now, see below).
- You’ll need to get investor consent (if you had investor consent provisions in your last round), do a shareholder resolution and a board resolution to get permission from your existing investors and shareholders to enter into the scheme.
- Download the Future Fund Convertible Note from the gov.uk site (it’s not there yet, they say it will be sometime in May).
- Fill in all the requested details, including details of all the investors and their investments.
- Do KYC (Know Your Investor) and AML (Anti Money Laundering) checks on your investors.
- All your investors will need to sign the Convertible Note.
- Email the signed Convertible Note, together with any requested shareholder approvals, to a Future Fund email address.
- A Future Fund inspector will check that your company qualifies (perhaps by e.g. checking that your Companies House filings show that you’ve raised more than £250K previously), that all the investors and their investments are legitimate, that all the investors have signed, etc.
- Future Fund will email you back saying you’re cleared to proceed, attaching (or, because it’s the government, perhaps sending you by physical mail) the government-signed agreement.
- Your investors send their funds to your company bank account.
- Send Future Fund a copy of your bank statements or other proof that funds have been received from all the investors.
- The government wire their funds to you.
The important thing to note is that the government and all your new investors will sign the same, single convertible note document. That’s going to make the logistics quite difficult, and raises a bunch of issues:
- What happens if all the investors sign, but the government doesn’t (maybe the £250M fund ran out in the meantime)?
- What happens if the investors all sign but then one of them doesn’t send funds?
- Can you remove any investors who don’t complete, or does the whole round fall apart?
We think it would be better if each investor could simply sign their own convertible note or SEIS/EIS compatible SeedFAST on whatever deal terms you agreed with them, and then the government would sign their matching investment convertible note with their own deal terms. But, so far as we can tell, that’s not the way it’s being designed, the reason, quite reasonably, is that the government doesn’t have the time to read a dozen different convertible notes in any given round to check the minutiae of each investments, so they’re mandating that all investors sign their, single, document.
3. Find investors
Okay, so now you know how the process will work (or at least our best guess as to how it will work) the most important thing you can do, starting right now, is go find investors!
Future Fund starts out at a paltry £250M, that’s enough to fund just 500 companies in all of the UK if their average investment size is £500K. Word is that the government will top up the fund based on demand, but there’s no guarantee of that, or when that might happen.
So, you want to be first in the queue. And to do that you don’t want to start approaching investors when the fund opens, you want to do that right now, so the moment the doors open you’re right there, submitting your application before anyone else does.
- If you think you’ll be raising primarily from existing investors, talk to them now, explain the fund terms, explain the match investment, try to get them to commit to topping up their last investment.
- If you think you’ll be raising primarily from new funds and VCs, they can take literally months in due diligence process, so you should be prepared for that by sorting all your due diligence paperwork now, so you have a beautiful document bundle ready for them. And to do that, just sign up on SeedLegals and go to Quick Agreements -> Investor Agreements, and there’s a free Due Diligence checklist, get started on that right now.
- If you think you’ll be raising primarily from angel investors, well, you’re going to have your work cut out persuading them to invest without SEIS or EIS. Yes, that’s right, outrageously, the Future Fund is, as of today, not compatible with SEIS/EIS, which means you’re going to need to read The Art Of The Deal (no, don’t actually do that) to persuade them that the 8% interest and other VC-friendly deal terms that the government has come up with (which will come out of your company’s pocket) will to some extent compensate them for their not getting SEIS/EIS. You’ll have your work cut out here.
4. Do your investor KYC / AML checks
When you take money from investors you’re meant to do a Know Your Customer / Anti-Money Laundering check. At simplest it’s just getting your investor to send you a copy of the photo page of their passport, and keeping that on file. Few companies bother with this, but since it would be embarrassing for the government to be seen match-funding a drug cartel investment it’s likely they’re going to want to see those KYC / AML check results. At SeedLegals we’re working on a streamlined process for doing that, based on the actual requirements as they become clear, stay tuned for more on that.
5. Make sure your Companies House filings are up to date
The government is likely going to want to verify that you’ve met the qualifying condition of having raised at least £250K previously. We don’t know how they’ll do that, but one obvious method they may use is to check your Companies House filings, where there should be an SH01 filed for each share issue. So all they need to do is multiply the number of shares on each SH01 by the stated price per share to know how much you’ve raised. This information is all public, and since each of the Companies House filings are time stamped, and nobody thought to game the system until now, it’s a pretty good way of checking.
This means that if you’re behind on your Companies House filings, you need to fix that right now – you wouldn’t want the failure to post the SH01 timeously for your last round to mean you don’t qualify for Future Fund, or, more likely, incur several weeks of delay while you fix it.
6. Arrange investor consents
Before you can enter into an arrangement to issue more shares in the future you need shareholder approval (since those shareholders will be diluted by the new offering), a board meeting to approve the transaction and, if you have Investor Consent provisions in your last funding round (which would be the case for most applying companies, since they would have had to have had prior funding rounds) you’ll need the consent of, typically, 50% of the investors by number of shares held.
None of this is rocket science, but it can take weeks to do the paperwork and get all the signatures in, so if you can get that done before the Future Fund doors open then you’re all set to go while other companies are futzing around waiting for their shareholder and investor approvals.
7. Get set up on SeedLegals
If you qualify for Future Fund:
Great, we’re here to help you get there ahead of everyone who’s not using SeedLegals.
- We’ll create all the supporting shareholder and investor approvals in one seamless process.
- All your shareholders and existing investors can e-sign everything on online, no messing around printing and posting things.
- By creating your cap table on SeedLegals up front you’re all set to provide the government with your complete cap table showing all the prior investments, beautifully laid out ready for the fastest possible approval.
- Then, it’s not just the government that needs to approve their investment, you’ll still need to do everything, just like before, to close the investments of all your other investors. By using SeedLegals, we’ll help you sort the Due Diligence, Warranties and more, quickly and efficiently.
- Once you’re approved and all the funds are in, that will create a nice Debt Certificate for each investor, and their investment will be logged in your SeedLegals Debt Table.
- And, when you’re ready for your next funding round, everything will be perfectly set up ready for these investors and the government to convert or be repaid, and to close your next round.
If you don’t qualify for Future fund, don’t despair:
Try to figure out as quickly as possible whether this fund will work for you or not. If not, most importantly don’t wait, get cracking on finding SEIS/EIS investors! All the companies applying for Future Fund will be waiting on non-SEIS/EIS funds and VCs to take their call, you can use the opportunity to reach out to all the angel investors you know.
And angel investment is not in bad health right now, at least compared to VC investment, see our SeedLegals deal data.
So, take advantage of everyone else being distracted by Future Fund, go find some angel investors, and use SeedLegals agile fundraising to get SEIS/EIS funding directly, on much better terms than the actually pretty bad terms (for companies, not investors!) that the government are offering.
And, regardless of whether Future Fund can help you or not, if cash is tight here’s how to cut costs and extend your runway while you’re looking for funding.