21 April 2020 - Authored by:William Samengo-Turner
In what will undoubtedly be a relief for UK’s life science sector, the government yesterday unveiled the ways in which it plans to support the community of fast-growth businesses that drive so much innovation within its domestic market and around the world.
Privately held UK businesses that have raised at least £250,000 in the last five years will be entitled to apply for loans of between £125,000 and £5,000,000 so long as the funds are at least matched by existing investors. Although some details will still have to be confirmed, the government investment will be by way of convertible notes, providing for a conversion into equity at a 20% discount if not repaid within three years.
Initial reaction to the announcement in the market has been cautiously positive. Although it will be important to assess the detail of the new scheme, the government’s approach of using a well-understood funding instrument (the convertible note) would appear to be sensible. Both issuers and investors will be familiar with this type of investment and we would therefore hope that much-needed funds would flow reasonably quickly.
It is, of course, important for founders, investors and the companies themselves to carefully consider the pros and cons of taking on state finance. It is also important to weigh up the decision in light of the very many pressures facing these businesses in the current environment. A lifeline from government may well be essential but thought should also be given as to whether there are other competing priorities or other routes through the crisis to long-term stability.
It will also be important to understand the specifics of the government’s scheme before committing to the Future Fund. The indicative headline terms mention a number of provisions that may give issuers pause, including a most favoured nations clause, unspecified (but “limited”) corporate governance rights and an ongoing right to the same information as other investors. These may all be acceptable to start-ups and their stakeholders but, as ever, the devil will be in the detail.
UK government guidance on the new fund may be found here. Or click here to read our assessment of the key current considerations for high-growth and emerging businesses (and their investors) both in relation to accessing government finance, and also the wider challenges currently facing the sector.